public joint stock company “raiffeisen bank aval” consolidated … · 2015-01-27 · public...

Public Joint Stock Company “Raiffeisen Bank Aval”

Consolidated IFRS Financial Statements

For the year ended 31 December 2013 Together with Independent Auditors’ Report

Public Joint Stock Company “Raiffeisen Bank Aval” 2013 Consolidated IFRS Financial Statements

CONTENTS

INDEPENDENT AUDITORS’ REPORT

CONSOLIDATED IFRS FINANCIAL STATEMENTS

Consoliadted IFRS Statement of Financial Position ....................................................................................... 1 Consolidated IFRS Income Statement ............................................................................................................ 2 Consolidated IFRS Statement of Comprehensive Income .............................................................................. 3 Consolidated IFRS Statement of Changes in Equity ...................................................................................... 4 Consolidated IFRS Statement of Cash Flows ................................................................................................. 5

NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS

1. Principal activities ........................................................................................................................................ 6 2. Operating environment of the Bank ............................................................................................................ 6 3. Basis of preparation ..................................................................................................................................... 7 4. Summary of accounting policies .................................................................................................................. 7 5. Significant accounting judgements and estimates .................................................................................... 19 6. Segment information ................................................................................................................................. 19 7. Cash and cash equivalents ....................................................................................................................... 22 8. Mandatory reserves in the National Bank of Ukraine ................................................................................ 22 9. Trading securities ...................................................................................................................................... 22 10. Amounts due from credit institutions ....................................................................................................... 23 11. Loans to customers ................................................................................................................................. 23 12. Assets held for sale ................................................................................................................................. 25 13. Investment securities ............................................................................................................................... 25 14. Investment property ................................................................................................................................. 26 15. Property and equipment .......................................................................................................................... 26 16. Intangible assets ...................................................................................................................................... 27 17. Taxation ................................................................................................................................................... 28 18. Other impairment and provisions ............................................................................................................ 31 19. Other assets and other liabilities ............................................................................................................. 31 20. Amounts due to credit institutions ........................................................................................................... 32 21. Amounts due to customers ...................................................................................................................... 32 22. Debt securities issued ............................................................................................................................. 33 23. Subordinated debt ................................................................................................................................... 33 24. Equity ....................................................................................................................................................... 33 25. Commitments and contingencies ............................................................................................................ 35 26. Net fee and commission income ............................................................................................................. 36 27. Other income ........................................................................................................................................... 36 28. Personnel and other administrative and operating expenses ................................................................. 37 29. Risk management .................................................................................................................................... 37 30. Fair values of financial instruments ......................................................................................................... 50 31. Maturity analysis of assets and liabilities ................................................................................................. 56 32. Related party transactions ....................................................................................................................... 58 33. Capital adequacy ..................................................................................................................................... 60 34. Subsequent events .................................................................................................................................. 61

Other information in accordance with the requirements of the Ukrainian legislation


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CONSOLIDATED IFRS STATEMENT OF FINANCIAL POSITION as at 31 December 2013 (in thousands of Ukrainian hryvnia)

Notes 2013 2012

Assets

Cash and cash equivalents 7 5,734,275 9,773,797

Mandatory reserves in the National Bank of Ukraine 8 576,312 526,494

Trading securities 9 210,622 204,540

Amounts due from credit institutions 10 30,271 3,525

Loans to customers 11 31,069,913 29,813,198

Assets held for sale 12 60,575 352,920

Investment securities: 13

- designated at fair value through profit or loss 5,151,277 6,087,472

- available-for-sale 1,172 108,163

- held-to-maturity 538,629 922,747

Investment property 14 200,558 142,487

Property and equipment 15 2,279,868 2,345,734

Intangible assets 16 467,157 507,310

Current income tax assets 5,565 804

Deferred income tax assets 17 36,480 44,963

Other assets 19 722,720 368,407

Total assets 47,085,394 51,202,561

Liabilities

Amounts due to the National Bank of Ukraine 402,137 150,586

Amounts due to credit institutions 20 7,708,249 11,941,762

Amounts due to customers 21 26,832,644 27,964,034

Debt securities issued 22 70,160 37,514

Current income tax liabilities 95,762 67,868

Subordinated debt 23 2,377,704 2,374,272

Provisions 18 25,481 23,420

Other liabilities 19 573,454 573,598

Total liabilities 38,085,591 43,133,054

Equity

Share capital 24 3,002,775 3,083,449

Additional paid-in capital 3,033,375 3,032,776

Revaluation reserves 24 964,647 1,076,158

Reserve and other funds 281,388 278,625

Retained earnings 1,749,434 632,716

Total equity attributable to shareholders of the Bank 9,031,619 8,103,724

Non-controlling interest (31,816) (34,217)

Total equity 8,999,803 8,069,507

Total equity and liabilities 47,085,394 51,202,561

Signed and authorised for release on behalf of the Management Board of the Bank

Volodymyr Lavrenchuk Ludmila Makarenko

Chairman of the Board Chief Accountant

18 April 2014

The accompanying notes on pages 6 to 61 are an integral part of these consolidated IFRS financial statements


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CONSOLIDATED IFRS INCOME STATEMENT for the year ended 31 December 2013 (in thousands of Ukrainian hryvnia)

Notes 2013 2012

Interest income

Loans to customers 4,758,210 5,082,349

Amounts due from credit institutions 68,282 50,344

Investment securities 655,690 811,727

5,482,182 5,944,420

Interest expense

Amounts due to customers (1,377,594) (1,363,191)

Amounts due to credit institutions (412,097) (766,336)

Subordinated debt (194,366) (228,539)

Amounts due to the National Bank of Ukraine (4,425) (3,441)

(1,988,482) (2,361,507)

Net interest income 3,493,700 3,582,913

Allowance for loan impairment 10, 11 (1,295,664) (1,102,211)

Net interest income after allowance for loan impairment 2,198,036 2,480,702

Fee and commission income 1,704,136 1,562,955

Fee and commission expense (344,010) (239,817)

Fees and commissions, net 26 1,360,126 1,323,138

Net gains/(losses) from foreign currencies:

- dealing 141,798 118,895

- translation differences (17,358) 707

Net gains/(losses) from securities:

Trading securities 8,437 (7,487)

Investment securities designated at fair value through profit or loss:

- dealing 30,680 (10,411)

- revaluation 241,105 (211,707)

Investment securities available-for-sale 217,668 -

Other income 27 96,700 81,585

Non-interest income/(expenses) 719,030 (28,418)

Personnel expenses 28 (1,513,315) (1,543,488)

Depreciation and amortisation 15,16 (449,129) (463,243)

Other administrative and operating expenses 28 (1,016,281) (1,182,970)

Impairment of subsidiaries (8,555) -

Charge of allowances for impairment of other assets and provisions 18 (3,195) (10,497)

Impairment loss from assets held for sale (15,512) -

Revaluation of investment property 14 - (2,919)

Non-interest expense (3,005,987) (3,203,117)

Profit before income tax expenses 1,271,205 572,305

Income tax expenses 17 (253,925) (253,038)

Profit for the year 1,017,280 319,267

Attributable to:

- shareholders of the Bank 1,014,879 318,843

- non-controlling interest 2,401 424

1,017,280 319,267

Profit attributable to shareholders of ordinary shares 1,014,179 318,143

Profit attributable to shareholders of preference shares 700 700

1,014,879 318, 843

Earnings per share

Weighted average number of ordinary shares (in thousands) 29,977,656 29,969,945

Weighted average number of preference shares (in thousands) 49,994 49,986

Basic and diluted earnings per ordinary share (in hryvnias) 0.0338 0.0106

Basic and diluted earnings per preference share (in hryvnias) 0.0140 0.0140

The accompanying notes on pages 6 to 61 an integral part of these consolidated IFRS financial statements


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CONSOLIDATED IFRS STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2013 (in thousands of Ukrainian hryvnia)

Notes 2013 2012

Profit for the year 1,017,280 319,267

Other comprehensive income

Items that are or may be reclassified subsequently to profit or loss:

Unrealised gains on investment securities available-for-sale 24 - 34,258 Change in fair value on investment securities available-for-sale transferred to profit or loss 24 (103,671) - Income tax relating to gains on investment securities available-for-sale 17, 24 16,587 (5,481)

Total items that are or may be reclassified subsequently to profit or loss (87,084) 28,777

Items that will not be reclassified to profit or loss:

Revaluation of property 24 - (62,574)

Income tax relating to revaluation of property 17, 24 - 10,012

Total items that will not be reclassified to profit or loss - (52,562)

Other comprehensive income for the year, net of tax (87,084) (23,785)

Total comprehensive income for the year 930,196 295,482

Attributable to:

- shareholders of the Bank 927,795 295,058

- non-controlling interest 2,401 424

930,196 295,482



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CONSOLIDATED IFRS STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2013

(in thousands of Ukrainian hryvnia)

Attributable to shareholders of the Bank

Notes Share

capital Additional

paid-in capital Revaluation

reserves Reserve and other funds

Retained earnings Total

Non-controlling

interest Total equity

31 December 2011 3,083,241 3,032,156 1,155,285 277,092 260,764 7,808,538 (34,641) 7,773,897

Total comprehensive income for the year - - (23,785) - 318,843 295,058 424 295,482

Depreciation of revaluation reserve 24 - - (23,848) - 23,848 - - -

Transfer of tax effect from revaluation of property 24 - - (31,494) - 31,494 - - -

Allocation of retained earnings to reserve and other funds - - - 1,533 (1,533) - - -

Dividends declared to shareholders of the Bank 24 - - - - (700) (700) - (700)

Sale of treasury shares 24 1,546 4,615 - - - 6,161 - 6,161

Purchase of treasury shares 24 (1,338) (3,995) - - - (5,333) - (5,333)

31 December 2012 3,083,449 3,032,776 1,076,158 278,625 632,716 8,103,724 (34,217) 8,069,507

Total comprehensive income for the year - - (87,084) - 1,014,879 927,795 2,401 930,196

Depreciation of revaluation reserve 24 - - (23,533) - 23,533 - - -

Transfer of revaluation upon disposal of property 24 - - (894) - 894 - - -

Allocation of retained earnings to reserve and other funds - - - 2,763 (2,763) - - -

Transfer of inflation adjustment 24 (80,875) - - - 80,875 - - -

Dividends declared to shareholders of the Bank 24 - - - - (700) (700) - (700)

Sale of treasury shares 24 201 599 - - - 800 - 800

31 December 2013 3,002,775 3,033,375 964,647 281,388 1,749,434 9,031,619 (31,816) 8,999,803



(in thousands of Ukrainian hryvnia unless otherwise stated)

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CONSOLIDATED IFRS STATEMENT OF CASH FLOWS for the year ended 31 December 2013 (in thousands of Ukrainian hryvnia)

Notes 2013 2012

Cash flows from operating activities

Interest received 5,259,085 5,666,957

Interest paid (2,016,214) (2,292,864)

Commissions received 1,755,361 1,526,976

Commissions paid (344,010) (239,817)

Gains/(losses) from trading securities 5,454 (19)

Gains from dealing in foreign currencies 141,798 118,895

Other operating income received 95,746 77,856

Personnel expenses (1,453,229) (1,558,490)

Other operating and administrative expenses paid (967,522) (945,289)

Income tax paid (208,471) (54,342)

Cash flow from operating activities before changes in operating assets and liabilities 2,267,998 2,299,863

Net (increase)/decrease in operating assets:

Mandatory reserves in the National Bank of Ukraine (53,249) (83,857)

Trading securities (3,098) 98,136

Investment securities designated at fair value through profit or loss 1,258,252 (206,770)

Amounts due from credit institutions (24,024) 6,793

Loans to customers (2,460,118) 3,006,761

Other assets (194,363) (90,781)

Net increase/(decrease) in operating liabilities:

Amounts due to credit institutions, short-term (9,343) (171,020)

Amounts due to customers (1,185,404) 704,378

Debt securities issued 31,950 (5,636)

Other liabilities (52,888) 93,428

Net cash flows from/(used in) operating activities (424,287) 5,651,295

Cash flows from investing activities

Proceeds from investment securities available-for-sale 220,988 -

Purchase of investment securities held-to-maturity - (3,500)

Proceeds from redemption of investment securities held-to-maturity 400,411 1,332,480

Purchase of investment property (7,875) (27,423)

Proceeds from investment property 5,191 -

Proceeds from assets held for sale 35,134 -

Purchase of property and equipment (209,018) (250,630)

Proceeds from sale of property and equipment 2,079 16,813

Purchase of intangible assets (109,818) (143,384)

Dividends received 953 310

Net cash flows from investing activities 338,045 924,666

Cash flows from financing activities

Purchase of treasury shares - (5,333)

Sale of treasury shares 800 6,161

Repayment of borrowings from credit institutions, long-term (3,977,637) (3,962,183)

Dividends paid (685) (688)

Net cash flows used in financing activities (3,977,522) (3,962,043)

Effect of exchange rate changes on cash and cash equivalents 24,242 (6,902)

Net change in cash and cash equivalents (4,039,522) 2,607,016

Cash and cash equivalents, 1 January 7 9,773,797 7,166,781

Cash and cash equivalents, 31 December 7 5,734,275 9,773,797


Public Joint Stock Company “Raiffeisen Bank Aval” Notes to the 2013 Consolidated IFRS Financial Statements (in thousands of Ukrainian hryvnia unless otherwise stated)

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1. Principal activities Joint Stock Commercial Bank “Aval” (hereinafter – “Raiffeisen Bank Aval”) was registered on 27 March 1992 by the National Bank of Ukraine (hereinafter – the “NBU”), as an open joint stock company under the laws of Ukraine. In April 1994, the Bank was re-registered as Joint Stock Post-Pension Bank “Aval”. In 2006, the Bank was re-registered as Open Joint Stock Company “Raiffeisen Bank Aval” and in 2009 re-registered in the form of a public joint stock company in line with changes of the Ukrainian legislation. The Bank operates under a general banking license #10 dated 5 October 2011 (as issued by the NBU) and in accordance with Ukrainian legislation, including Law of Ukraine “On banks and banking” and other legislative acts issued by the NBU.

Raiffeisen Bank Aval accepts deposits from individuals, legal entities and budgetary institutions, issues loans, renders payment services in Ukraine and transfers payments abroad, performs currencies exchange transactions, settlements and other banking services to its clients.

With effect from 1999, the Bank has been a participant of the “Guaranteeing Fund of Individuals’ Deposits”. The fund operates under the Law of Ukraine “On the Guaranteeing Fund of Individuals’ Deposits”. The fund covers the Bank’s liabilities to its individual depositors for an amount up to 200 thousand Ukrainian hryvnia (before 7 September 2012 - 150 thousand Ukrainian hryvnia) for each individual in the event of business failure and revocation of the banking licence by the NBU.

The Bank’s main office is in Kyiv. Bank has 25 branches and 796 operating outlets throughout Ukraine (2012 - 25 branches and 823 outlets).

Raiffeisen Bank Aval’s registered legal address is 9 Leskova St., Kyiv, Ukraine.

The parent bank and controlling shareholder of Raiffeisen Bank Aval is Raiffeisen Bank International AG, Austria.

Raiffeisen-Landesbanken-Holding GmbH (Austria) controls the direct owner – parent company Raiffeisen Bank International AG (hereinafter – “RBI”), being the ultimate shareholder of the Bank.

As at 31 December 2013 and 2012, the Bank’s shareholding structure based on the amount of outstanding shares was as follows:

Shareholders 2013, % 2012, % Raiffeisen Bank International AG 96.45 96.41 Other legal entities 3.00 3.01 Individuals 0.55 0.58 Total 100.00 100.00

As at 31 December 2013, key management personnel of the Bank owned 24,100 shares of the Bank (0.00%) (2012 – 24,100 shares, 0.00%).

2. Operating environment of the Bank Ukraine's political and economic situation has deteriorated significantly since the Government's decision not to sign the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the European Union in late November 2013. Political and social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit and a depletion of the National Bank of Ukraine’s foreign currency reserves and, as a result, a further downgrading of the Ukrainian sovereign debt credit ratings. In February 2014, following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions and also announced a transition to a floating foreign exchange rate regime. The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy.

Whilst management believes it is taking appropriate measures to support the sustainability of the Bank’s business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Bank’s results and financial position in a manner not currently determinable. These consolidated financial statements reflect management’s current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Bank. The future business environment may differ from management’s assessment. These consolidated financial statements do not include any adjustments for the impact of events in Ukraine that have occurred after the reporting date.

Public Joint Stock Company “Raiffeisen Bank Aval” Notes to the 2013 Consolidated IFRS Financial Statements


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3. Basis of preparation

General information

These consolidated IFRS financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter - “IFRS”), requirements of the National Bank of Ukraine on financial reporting by Ukrainian banks, Ukrainian legislation, and the effective regulations on submission of annual reports by issuers and professional participants in the stock market to the National Commission on Securities and Stock Market.

Effective for the year ended 31 December 2012, the changes to the Law of Ukraine “On Accounting and Financial Reporting” were adopted by the Ukrainian Parliament according to which banks in Ukraine should prepare and file their annual financial statements in accordance with the requirements of IFRS and the requirements of the NBU. Therefore, IFRS became the obligatory reporting framework for Ukrainian banks starting from the annual financial statements as at and for the year ended 31 December 2012. Based on this, in 2011 the NBU adopted Resolution No. 373 which regulates preparation, presentation and filing of banks’ financial statements in accordance with the requirements of IFRS. The National Bank of Ukraine also allowed to prepare notes at the same format as for financial statements 2012.

The consolidated IFRS financial statements were prepared on a historical cost basis except for trading securities, investment securities designated at fair value through profit or loss, investment securities available-for-sale measured at fair value, investment property and property measured at revalued amount.

The consolidated IFRS financial statements comprise the financial statements of the Bank and its subsidiaries for the years ended 31 December 2013 and 2012 (together referred to as the “Bank”). A list of consolidated subsidiaries is disclosed in the Note 4.

Inflation accounting

The Ukrainian economy was considered hyperinflationary until 31 December 2000. As such, the Bank has applied IAS 29 “Financial accounting in hyperinflationary economies”. The effect of applying IAS 29 is that non-monetary items, including components of equity, were restated to the measuring units current at 31 December 2000 by applying the relevant inflation indices to the historical cost, and that these restated values were used as a basis for accounting in subsequent accounting periods.

4. Summary of accounting policies

The main principles of accounting policy are presented below and were used in preparation of consolidated financial statements. These accounting policies where applied consistently in all periods.

Financial instruments

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial asset – is any asset that is:

- cash;

- an equity instrument of another entity;

- a contractual right to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the Bank; or

- a contract that will or may be settled in the Bank's own equity instruments and is a non-derivative for which the Bank is or may be obliged to receive a variable number of the entity's own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Bank's own equity instruments.

Financial liability – is any liability that is:

- a contractual obligation to deliver cash or another financial asset to another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Bank; or

- a contract that will or may be settled in the Bank's own equity instruments and is: a non-derivative for which the entity is or may be obliged to deliver a variable number of the Bank's own equity instruments; or a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Bank's own equity instruments.



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Financial assets

Initial recognition

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate.

When financial assets are recognised initially, they are measured at fair value, and, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.

Date of recognition

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading and those designated at fair value through profit or loss at inception are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for selling in the near term. Financial assets are designated by the Bank at fair value through profit or loss if they are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy. Gains or losses on financial assets at fair value through profit or loss are recognised in the consolidated income statement.

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Bank has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortised cost. Gains and losses are recognised in the consolidated income statement when the investments are impaired, as well as through the amortisation process.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as trading securities or designated as investment securities available-for-sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is reclassified to the consolidated income statement. However, interest calculated using the effective interest method is recognised in the consolidated income statement.

Determination of fair value

The fair value for financial instruments traded in active market at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models and other relevant valuation models.

Fair value measurement principles

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.



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When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in pricing transaction.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

- Level 1: inputs that are quoted market prices (unadjusted) in active markets.

- Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

- Level 3: Inputs that are unobservable. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Offsetting

Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Impairment of financial assets

The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Amounts due from credit institutions and loans to customers

For amounts due from credit institutions and loans to customers carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced using an allowance account and the amount of the loss is recognised in the consolidated income statement. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously



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recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the consolidated income statement.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated based on historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group or their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Held-to-maturity financial investments

For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated income statement.

If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the consolidated income statement.

Available-for-sale financial investments

For available-for-sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement – is reclassified from other comprehensive income to the consolidated income statement. Impairment losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment are recognised in other comprehensive income.

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded in the consolidated income statement. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement.

Renegotiated loans

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions.

The accounting treatment of such restructuring is as follows:

- If the currency of the loan has been changed the old loan is derecognised and the new loan is recognised.

- If the loan restructuring is not caused by the financial difficulties of the borrower the Bank uses the same approach as for financial liabilities described below.

- If the loan restructuring is due to the financial difficulties of the borrower and the loan is impaired after restructuring, the Bank recognizes the difference between the present value of the new cash flows discounted using the original effective interest rate and the carrying amount before restructuring in the provision charges for the period. In case loan is not impaired after restructuring the Bank recalculates the current effective interest rate.



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Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original or current effective interest rate.

Derecognition of financial assets and liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:

- the rights to receive cash flows from the asset have expired;

- the Bank has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and

- the Bank either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Bank has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Bank’s continuing involvement is the amount of the transferred asset that the Bank may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Bank’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, current accounts with the NBU (excluding mandatory reserves in the National Bank of Ukraine) and credit institutions and amounts due from credit institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.

Precious metals

Gold and other precious metals are recorded at NBU bid prices, which approximate fair values and are quoted at a discount to London Bullion Market rates. Changes in the NBU bid prices are recorded as translation differences from precious metals in other income.

Repurchase and reverse repurchase agreements and securities lending

Sale and repurchase agreements (“repos”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the consolidated statement of financial position and, in the event that the transferee has the right by contract or custom to sell or repledge them, they are reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers.

Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts due from credit institutions or loans to customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method.

Securities lent to counterparties are retained in the consolidated statement of financial position. Securities borrowed are not recorded in the consolidated statement of financial position, unless these are sold to third parties, in which case the purchase and sale are recorded within gains less losses from trading securities in the consolidated income statement. The obligation to return them is recorded at fair value as a trading liability.



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Derivative financial instruments

In the normal course of business, the Bank enters into various derivative financial instruments including forwards, swaps and options in the foreign exchange market. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in profit or loss.

Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated income statement.

Swaps are contractual agreements between two parties to exchange movements in interest and foreign currency rates and equity indices, and (in the case of credit default swaps) to make payments with respect to defined credit events based on specified notional amounts.

Promissory notes

Promissory notes purchased are included in available-for-sale investment securities, or in amounts due from credit institutions or in loans to customers, depending on their substance and are accounted for in accordance with the accounting policies for these categories of assets.

Borrowings

Financial instruments issued or their components are classified as liabilities, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include amounts due to the National Bank of Ukraine, credit institutions; amounts due to customers, debt securities issued and subordinated debt.

After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated income statement when the borrowings are derecognised as well as through the amortisation process.

If the Bank purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is recognised in the consolidated income statement.

Leases

i. Finance – Bank as lessee

The Bank recognises finance leases as assets and liabilities in the consolidated statement of financial position at the date of commencement of the lease term at amounts equal to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor used is the interest rate implicit in the lease, when it is practicable to determine; otherwise, the Bank’s incremental borrowing rate is used. Initial direct costs incurred are included as part of the asset. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The costs identified as directly attributable to activities performed by the lessee for a finance lease, are included as part of the amount recognised as an asset under the lease.

ii. Finance - Bank as lessor

The Bank recognises lease receivables at a value equal to the net investment in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables.

iii. Operating - Bank as lessee

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under an operating lease are recognised as expenses on a straight-line basis over the lease term and included into other operating expenses.

iv. Operating - Bank as lessor

The Bank presents assets subject to operating leases in the consolidated statement of financial position according to the nature of the asset. Lease income from operating leases is recognised in the consolidated income statement on a straight-line basis over the lease term as other income. The aggregate cost of incentives provided to lessees is recognised as a reduction of rental income over the lease term on a straight-line basis.



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Business combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Bank.

The Bank measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

The Bank elects on transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the recognsied amount of the identifiable net assets of the acquiree, at the acquisition date.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Bank incurs in connection with a business combination are expensed as incurred.

Subsidiaries

Subsidiaries are investees controlled by the Bank. The Bank controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Bank consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Acquisitions and disposals of non-controlling interests

The Bank accounts for the acquisitions and disposals of non-controlling interests as transactions with equity holders in their capacity as equity holders. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent.

Associates

Associates are those entities in which the Bank has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Bank’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Bank’s share of losses exceeds the Bank’s interest (including long-term loans) in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Bank has incurred obligations in respect of the associate.

Transactions eliminated on consolidation

Intra-Bank balances and transactions, and any unrealised gains arising from intra-Bank transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Bank’s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

Goodwill

Goodwill on acquisitions of subsidiaries is included in intangible assets. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate.

Goodwill is allocated to cash-generating units for impairment testing purposes and is stated at cost less impairment losses.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.



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Non-controlling interests

Non-controlling interests are the equity in a subsidiary not attributable, directly or indirectly, to the Bank.

Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity attributable to equity holders of the Bank. Non-controlling interests in profit or loss and total comprehensive income are separately disclosed in the consolidated income statement and consolidated statement of comprehensive income.

The consolidated financial statements include the following subsidiaries:

Subsidiary

Ownership / Voting, %

Country Date of

incorporation Industry 2013 2012

LLC "Raiffeisen Leasing Aval" 87.08 87.08 Ukraine 29 June 2006 Finance leasing

LLC "Raiffeisen Aval Asset Management" - 100.00 Ukraine 12 September 2007 Asset management

LLC REC GAMMA 100.00 - Ukraine 26 March 2013 Property management

As at 31 December 2013, JSC “Vinegar-yeast Plant” is an associate of the Bank with share capital 33.84% (2012 - JSC “Vinegar-yeast Plant” – 33.84%). Investments in associates are recognized as investment securities available-for-sale and are totally impaired (Note 18).

In October 2013 investment in subsidiary LLC "Raiffeisen Aval Asset Management" was impaired. This caused the change in the consolidation group as at the end of the financial year.

Investment property

Investment property is held by the Bank for the purpose of earning rental income or for capital appreciation and is not occupied by the Bank.

Investment property is initially measured at cost together within transaction costs. Subsequent to initial recognition, investment property is carried at value that reflects the current market value and is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. Revaluation of investment property carried at each balance sheet date and recognized in the consolidated income statement as “Revaluation of Investment property”. Rental income is recognised in the consolidated income statement in other operating income.

Expenses are capitalized only when it is probable that the Bank will receive the associated economic benefits, and that their value can be reliably estimated. All other expenses (repairs and maintenance) are recognized as expenses in the certain period.

Property and equipment

Equipment is carried at cost or restated cost (for assets acquired prior to 31 December 2000), excluding the costs of day-to-day servicing, less accumulated depreciation and any accumulated impairment. Buildings are measured at fair value less depreciation and impairment charged subsequent to the date of the revaluation. The carrying values of equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Following initial recognition at cost, buildings are carried at their revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Any revaluation surplus is credited to the revaluation reserve for property, which included in other comprehensive income, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated income statement, in which case the increase is recognised in the consolidated income statement. A revaluation deficit is recognised in the consolidated income statement, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the revaluation reserve for property and equipment.

An annual transfer from the revaluation reserve for property to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets’ original cost. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings.



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Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years

Buildings 6-50

Furniture, fixtures and other assets 2-25

Equipment and computers 2-15

Motor vehicles 6

The asset’s residual values, useful lives and methods are reviewed, and adjusted as appropriate, at each financial year-end.

Costs related to repairs and renewals are charged when incurred and included in other operating and administrative expenses unless they qualify for capitalisation.

Intangible assets

Intangible assets include acquired computer software and licences. Intangible assets acquired separately are measured on initial recognition at cost or restated cost (for assets acquired prior to 31 December 2000). Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic lives of 4 to 20 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods, for intangible assets with finite useful lives, are reviewed at least at each financial year-end.

Assets classified as held for sale

The Bank classifies a non-current asset (or a disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For this to be the case the non-current asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale must be highly probable.

The sale qualifies as highly probable if the Bank’s management is committed to a plan to sell the non-current asset (or disposal group) and an active program to locate a buyer and complete the plan must have been initiated. Further, the non-current asset (or disposal group) must have been actively marketed for a sale at price that is reasonable in relation to its current fair value and in addition the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification of the non-current asset (or disposal group) as held for sale.

The Bank measures an asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. The Bank recognises an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell if events or changes in circumstance indicate that their carrying amount may be impaired.

Taxation

The current income tax charge is calculated in accordance with Ukrainian taxation regulations.

Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes, except where the deferred income tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the reporting date.

Ukraine also has various operating taxes, which are assessed on the Bank’s activities. These taxes are included as a component of administrative and operating expenses.

Provisions

Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made.



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Retirement and other benefit obligations

The Bank does not have any pension arrangements separate from the State pension system of Ukraine, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned.

Share capital

Share capital

Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital.

Treasury shares

Where the Bank purchases its own shares, the consideration paid, including any attributable transaction costs, net of income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received is included in equity.

Financial guarantees

In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, in ‘Other liabilities’, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required settling any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is taken to the consolidated income statement. The premium received is recognised in the consolidated income statement on a straight-line basis over the life of the guarantee.

Dividends

Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date, proposed, or declared after the reporting date but before the financial statements are authorised for issue.

Segment reporting

The Bank’s segmental reporting is based on the following operating segments: Corporate and Small Enterprises, Micro Customers and Private Individuals, Financial Institutions, and Proprietary Business.

Operating segments are the Bank’s activity components, which provide income receiving and/or generate expenses, are reviewed by the management of the Bank, and according to which complete financial information for decision making is available.

Contingencies

Contingent assets are not recognised in the consolidated statement of financial position. Information about such assets is disclosed when inflow of economic benefits is probable.

Contingent liabilities are not recognised in the consolidated statement of financial position. Information about such liabilities is provided unless the possibility of any outflow in settlement is not remote.

Recognition of income and expense

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Interest and similar income and expense

For all financial instruments measured at amortised cost and interest bearing securities classified as trading or available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank



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revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount.

Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

- Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan.

- Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

Dividend income

Revenue is recognised when the Bank’s right to receive the payment is established.

Earnings per share

Basic earnings per share are calculated based on profit attributable to shareholders and weighted average number of ordinary shares outstanding during the period, less treasury shares. During the reporting period, no financial instruments with a dilutive effect were outstanding. Therefore, basic earnings per share equal diluted earnings per share.

Foreign currency translation

The consolidated financial statements are presented in Ukrainian hryvnia, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognised in the consolidated income statement as gains less losses from foreign currencies – translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Differences between the contractual exchange rate of a certain transaction in a foreign currency and the NBU exchange rate on the date of the transaction are included in gains less losses from dealing in foreign currencies. The official NBU exchange rates were UAH 7.9930 and UAH 7.9930 to 1 US dollar and UAH 11.0415 and UAH 10.5371 to 1 Euro at 31 December 2013 and 2012, respectively. As at 18 April 2014, the official NBU exchange rates were UAH 11.2274 to 1 US dollar and UAH 15.5555 to 1 Euro.

New and revised IFRSs in issue but not yet effective

A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2013, and are not applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Bank plans to adopt these pronouncements when they become effective.

IFRS 9 is to be issued in phases and is intended ultimately to replace IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 Financial Instruments: Classification and measurement was issued in November 2009 and relates to the classification and measurement of financial assets. Classification and measurement of financial liabilities was published in October 2010. The second phase of IFRS 9 Financial Instruments: Impairment methodology is not yet issued. The third phase Financial Instruments: Hedge accounting was issued in November 2013. The IASB tentatively decided to require entities to apply IFRS 9 for annual periods beginning on or after 1 January 2018. The Bank does not intend to adopt this standard early. The Bank has not yet analysed the likely impact of IFRS 9 on its financial position or performance.



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Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities do

not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The Amendments specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments are effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively.

Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2014. The Bank has not yet analysed the likely impact of the improvements on its financial position or performance.

Changes in accounting policies and presentation

The Bank has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2013:

- IFRS 13 Fair Value Measurements - Presentation of Items of Other Comprehensive Income (Amendments to IAS 1 Presentation of Financial

Statements) - Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) - IFRS 10 Consolidated Financial statements - IFRS 12 Disclosure of Interests in Other Entities (no impact on these consolidated financial statements).

The nature and the effect of the changes are explained below.

Fair value measurement

IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other IFRSs, including IFRS 7 Financial Instruments: Disclosures. (see Note 30).

As a result, the Bank adopted a new definition of fair value, as set out in Note 4. The change had no significant impact on the measurements of assets and liabilities. However, the Bank included new disclosures in the consolidated financial statements that are required under IFRS 13, comparatives not restated.

Presentation of items of other comprehensive income

As a result of the amendments to IAS 1, the Bank modified the presentation of items of other comprehensive income in its consolidated statement of comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be. Comparative information is also re-presented accordingly.

The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities or comprehensive income.

Financial instruments: Disclosures – Offsetting financial assets and financial liabilities

Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities

introduced new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements.

The Bank included new disclosures in the consolidated financial statements that are required under amendments to IFRS 7 and provided comparative information for new disclosures.

IFRS 10 Consolidated Financial statements

As a result of adoption of IFRS 10, the Bank changed its accounting policy with respect to determining whether it has control over and, consequently, whether it consolidates its investees. IFRS 10 introduces a new control model that is applicable to all investees, including structured entities.

In accordance with the transitional provisions of IFRS 10, the Bank reassessed the control conclusion for its investees as at 1 January 2013.

The Bank determined that its consolidated Bank structure remained unchanged under IFRS 10, and as a result, the consolidated financial statements are unaffected.

http://www.iasplus.com/en/standards/standard47



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5. Significant accounting judgements and estimates

Judgements

In the process of applying the Bank’s accounting policies, management has made the following judgements, apart from those involving estimates, which have the most significant effect on the amounts recognised in the consolidated financial statements:

Classification of securities

Securities owned by the Bank comprise Government and corporate bonds and corporate shares. Upon initial recognition, the Bank designates securities as financial assets with recognition of changes in fair value through profit or loss, held-to-maturity financial assets or available-for-sale financial assets with recognition of changes in fair value through other comprehensive income.

Estimation uncertainty

In the process of applying the Bank's accounting policies, management has used its judgements and made estimates in determining the amounts recognised in the consolidated financial statements. The most significant use of judgments and estimates are as follows:

Going concern

The Bank’s management has assessed the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values.

Allowance for impairment of loans and receivables

The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its judgement to adjust observable data for a group of loans or receivables to reflect current circumstances.

Deferred tax asset

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.

6. Segment information

For management purposes, the Bank is organised into four business segments based on products and services as follows:

Corporate and Small Enterprises

Principally handling loans and other credit facilities, deposit and current accounts for large corporate, institutional, small and medium sized customers.

Micro Customers and Private Individuals

Principally handling loans and other credit facilities, deposits and current accounts for micro business and private individuals, providing consumer loans, overdrafts, credit card facilities and settlement facilities to private individuals.

Financial Institutions Principally handling fee and commission generating services to financial institutions. Proprietary Business

Treasury, attracting deposits from financial institutions and other central management functions.



20

For the purpose of segment reporting, interest is allocated based on a pool rate determined by the Bank’s Treasury based on the Bank’s cost of borrowing.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance, as explained in the table below, is measured differently from profit or loss in the consolidated financial statements. Income taxes are managed on a group basis.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties.

In accordance with Parent Bank’s instructions, the following changes in segment reporting were made during 2012: starting from February 2012, long term borrowings received from foreign financial institutions are presented in ‘Proprietary business’ segment instead of ‘Financial institutions’ segment. The same approach was applied for financial year 2013.

No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Bank’s total revenue in 2013 and 2012.

The following table present revenue, expenses, assets and liabilities information regarding the Bank’s operating segments as at and for the year ended 31 December 2013:

2013

Corporate and Small

Enterprises

Micro Customers and

Private Individuals

Financial Institutions

Proprietary Business Total

Revenue

Interest income 2,728,065 2,020,528 - 733,589 5,482,182

Fee and commission income 466,929 1,202,626 20,574 14,007 1,704,136

Net gains from securities - 217,668 - 280,222 497,890

Net gains from foreign currencies 13,008 12,360 - 99,072 124,440

Other income 11,872 52,898 - 31,930 96,700

Inter-segment revenue/(expenses) 768,200 1,931,856 - (2,700,056) -

Total revenue/(expenses) 3,988,074 5,437,936 20,574 (1,541,236) 7,905,348

Expenses

Interest expense (420,204) (1,032,390) - (535,888) (1,988,482)

Fee and commission expense (24,584) (311,170) - (8,256) (344,010)

Allowance for loan impairment (650,409) (645,255) - - (1,295,664)

Personnel expenses (424,880) (1,042,542) - (45,893) (1,513,315)

Depreciation and amortization

(98,865) (330,022) - (20,242) (449,129)

Other administrative and operating expenses (247,082) (730,499) - (38,700) (1,016,281)

Allowances for impairment of other assets and provisions (696) (2,354) - (145) (3,195)

Impairment of subsidiaries - - - (8,555) (8,555)

Impairment loss from assets held for sale - - - (15,512) (15,512)

Inter-segment (expenses)/revenue (1,510,474) (1,352,107) - 2,862,581 -

Segment results 610,880 (8,403) 20,574 648,154 1,271,205

Income tax expense (253,925)

Profit for the year 1,017,280

Segment assets 25,329,935 14,149,185 - 7,606,274 47,085,394

Segment liabilities 8,804,842 18,006,371 - 11,274,378 38,085,591

Other segment information

Capital expenditure 86,999 263,147 - 16,145 366,291

Capital expenditure include amount of additions to property and equipment, intangible assets and investment property.



21

The following table presents reconciliation of total revenues for reportable segments and Bank’s revenues for the year ended 31 December 2013:

2013

Revenues for reportable segments:

Corporate and Small Enterprises 3,988,074

Micro Customers and Private Individuals 5,437,936

Financial Institutions 20,574

Proprietary Business 4,021,401

Total revenues for reportable segments 13,467,985

Elimination of intersegment revenues (5,562,637)

Bank’s revenues 7,905,348

Revenues for proprietary business include interest income, fee and commission income, net gains from foreign currencies, other income and other segment revenue.

The following table present revenue, expenses, assets and liabilities information regarding the Bank’s operating segments as at and for the year ended 31 December 2012:

2012

Corporate and Small

Enterprises

Micro Customers and

Private Individuals

Financial Institutions

Proprietary Business Total

Revenue

Interest income 3,165,235 1,897,562 906 880,717 5,944,420

Fee and commission income 443,790 1,085,867 15,572 17,726 1,562,955

Net gains from foreign currencies 13,543 45,330 - 60,729 119,602

Other income 22,698 21,990 - 36,897 81,585

Inter-segment revenue/(expenses) 834,272 1,487,152 - (2,321,424) -

Total revenue/(expenses) 4,479,538 4,537,901 16,478 (1,325,355) 7,708,562

Expenses

Interest expense (560,050) (881,469) - (919,988) (2,361,507)

Fee and commission expense (26,014) (203,625) (33) (10,145) (239,817)

Allowance for loan impairment (686,018) (416,191) - (2) (1,102,211)

Net gains/(losses) from securities 1,806 - 217 (231,628) (229,605)

Personnel expenses (412,224) (1,084,654) (4,791) (41,819) (1,543,488)

Depreciation and amortization

(152,717) (270,719) (129) (39,678) (463,243)

Other administrative and operating expenses (269,601) (852,432) (3,999) (56,938) (1,182,970)

Allowances for impairment of other assets and provisions (3,442) (6,153) (26) (876) (10,497)

Revaluation of investment property (957) (1,711) (7) (244) (2,919)

Inter-segment (expenses)/revenue (1,877,827) (1,474,777) - 3,352,604 -

Segment results 492,494 (653,830) 7,710 725,931 572,305

Income tax expense (253,038)

Profit for the year 319,267

Segment assets 23,027,531 15,290,384 9,056 12,875,590 51,202,561

Segment liabilities 9,808,100 18,015,921 502 15,308,531 43,133,054

Other segment information

Capital expenditure 143,874 222,146 9,131 23,481 398,632

Capital expenditure include amount of additions to property and equipment, intangible assets and investment property.



22

The following table presents reconciliation of total revenues for reportable segments and Bank’s revenues for the year ended 31 December 2012:

2012

Revenues for reportable segments:

Corporate and Small Enterprises 4,479,538

Micro Customers and Private Individuals 4,537,901

Financial Institutions 16,478

Proprietary Business 4,348,673

Total revenues for reportable segments 13,382,590

Elimination of intersegment revenues (5,674,028)

Bank’s revenues 7,708,562

Revenues for proprietary business include interest income, fee and commission income, net gains from foreign currencies, other income and other segment revenue.

7. Cash and cash equivalents

Cash and cash equivalents comprise:

2013 2012

Cash on hand 3,544,546 3,337,320

Current account with the National Bank of Ukraine 1,332,550 1,314,221

Current accounts with other credit institutions 806,736 5,008,098

Time deposits with credit institutions up to 90 days 50,443 114,158

Cash and cash equivalents 5,734,275 9,773,797

8. Mandatory reserves in the National Bank of Ukraine

With effect from October 2013, Ukrainian banks were required to keep 40% of the mandatory reserve for the previous month on a separate account with the NBU (from July 2012 - 50%; till July 2012 - 70%). The interest rate for this mandatory reserve is 30% of the official NBU discount rate.

As at 31 December 2013, the amount placed by the Bank on this account is UAH 416,689 thousand (2012 - UAH 383,280 thousand).

As at 31 December 2013 Ukrainian state bonds denominated in foreign currency with a carrying value of UAH 24,080 thousand (2012 – Ukrainian government bonds issued for Euro 2012 with a nominal value of UAH 80,000 thousand) were used by the Bank to partially cover its NBU mandatory reserve requirements.

With effect from October 2010, Ukrainian banks are required to deposit 20% of amounts attracted from non-residents in foreign currency for a period of less than 183 days on a separate account with the NBU in form of a non-interest bearing cash deposit.

With effect from April 2013, Ukrainian banks are required to deposit an amount equivalent to the impairment allowance (determined in accordance with the regulations of the NBU) created against loans granted in foreign currencies to borrowers with no foreign currency income on a separate account with the NBU in form of a non-interest bearing cash deposit.

As at 31 December 2013, the total amount placed by the Bank on the separate account was UAH 159,623 thousand (2012 - UAH 143,214 thousand). The Bank’s ability to withdraw this deposit is restricted.

The Bank meets established requirements for mandatory reserves as at 31 December 2013 and 31 December 2012.

9. Trading securities

Trading securities comprise:

2013 2012

Ukrainian State bonds 161,163 200,645

Bonds issued by Ukrainian financial institutions 48,808 3,345

Ukrainian Corporate bonds 651 550

Trading securities 210,622 204,540



23

10. Amounts due from credit institutions

Amounts due from credit institutions comprise:

2013 2012

Time deposits for more than 90 days or overdue - 25

Other amounts 30,271 3,500

30,271 3,525

Less – Allowance for impairment - -


The movements in allowance for impairment of amounts due from credit institutions were as follows:

2013 2012

1 January - 1,972

Charge - 2

Translation difference - (4)

Usage - (1,970)

31 December - -

11. Loans to customers

Loans to customers comprise:

2013 2012

Corporate 22,436,194 20,332,105

Small Enterprises 3,120,338 3,462,708

Private Individuals 11,947,347 13,124,231

Micro Customers 2,162,059 2,170,859

39,665,938 39,089,903

Less – Allowance for impairment (8,596,025) (9,276,705)

Loans to customers 31,069,913 29,813,198

Allowance for impairment of loans to customers

A reconciliation of the allowance for impairment of loans to customers by class is as follows:

Corporate

2013

Small Enterprises

2013

Private Individuals

2013

Micro Customers

2013 Total 2013

At 1 January 2013 3,040,990 1,173,725 4,757,538 304,452 9,276,705

Charge for the year 468,991 181,418 605,183 40,072 1,295,664

Amounts written off (659,563) (376,654) (931,189) (29,315) (1,996,721)

Recoveries 3,337 7,486 1,472 4,482 16,777

Translation difference 1,119 746 1,210 525 3,600

At 31 December 2013 2,854,874 986,721 4,434,214 320,216 8,596,025

Individual impairment 2,530,751 956,420 4,309,664 284,952 8,081,787

Collective impairment 324,123 30,301 124,550 35,264 514,238

Total impairment 2,854,874 986,721 4,434,214 320,216 8,596,025

Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 3,976,344 1,376,083 5,753,497 402,920 11,508,844



24

Corporate

2012

Small Enterprises

2012

Private Individuals

2012

Micro Customers

2012 Total 2012

At 1 January 2012 3,408,284 1,526,206 4,744,742 329,676 10,008,908

Charge for the year 436,414 249,604 396,689 19,502 1,102,209

Amounts written off (808,897) (609,896) (388,356) (46,342) (1,853,491)

Recoveries 5,670 6,974 2,380 1,411 16,435

Translation difference (481) 837 2,083 205 2,644

At 31 December 2012 3,040,990 1,173,725 4,757,538 304,452 9,276,705

Individual impairment 2,734,818 1,135,928 4,636,141 253,317 8,760,204

Collective impairment 306,172 37,797 121,397 51,135 516,501

Total impairment 3,040,990 1,173,725 4,757,538 304,452 9,276,705

Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 4,512,503 1,807,476 6,621,764 442,468 13,384,211

Changes in collection estimates can affect the impairment losses recognised. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the loan impairment as at 31 December 2013 would be UAH 310,699 thousand lower/higher (2012 - UAH 298,132 thousand).

Individually impaired loans

In accordance with the NBU requirements, loans may only be written off under the approval of the Management Board and, in certain cases, with the respective court decision.

The interest accrued on individually impaired loans for 2013 amounted UAH 614,572 thousand (2012 - UAH 406,505 thousand).

Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

- For commercial lending: charges over real estate properties, inventory and trade receivables;

- For retail lending: mortgages over residential properties.

Bank with prescribed periodicity monitors the market value of collateral, reassess its value, requires additional collateral in accordance with the underlying agreement.

Reverse repurchase agreements

As at 31 December 2013 Bank has no reverse repurchase agreements (2012 – nil).

Concentration of loans to customers

As at 31 December 2013, the Bank had a concentration of loans of UAH 5,095,001 thousand due from the ten largest third party borrowers or groups of borrowers (12.84% of gross loan portfolio) (2012 - UAH 5,608,698 thousand; 14.35% of loan portfolio). An allowance of UAH 1,101,934 thousand (2012 - UAH 870,750 thousand) was recognised against these loans.

Loans are made principally within Ukraine to companies of the following industry sectors:

2013 % 2012 %

Individuals 11,947,347 30 13,124,231 33

Trade enterprises 10,169,839 26 9,247,072 24

Manufacturing 5,672,018 14 6,254,989 16

Agriculture and food processing 4,673,166 12 2,717,538 7

Real estate and construction 4,130,291 10 4,215,333 11

Services 1,880,482 5 1,455,749 4

Transport and communications 595,983 1 1,564,675 4

Other industries 596,812 2 510,316 1

39,665,938 100% 39,089,903 100%



25

Finance lease receivables

Loans to customers include finance lease receivables that are analysed as follows:

2013 2012

gross net gross net

Investment in finance leases, receivable:

Not later than 1 year 768,924 601,330 1,093,068 978,445

Later than 1 year and not later than 5 years 1,678,979 1,493,796 1,100,382 954,340

Later than 5 years 4,376 4,043 18,249 17,020

Unearned future finance income on finance leases (353,110) - (261,894) -

Net investment in finance leases 2,099,169 2,099,169 1,949,805 1,949,805

As at 31 December 2013, loans to customers include loans granted under international financial institution financing programmes amounting to UAH 35,069 thousand (2012 - UAH 51,448 thousand).

12. Assets held for sale

As at 31 December 2013, the Bank held motor vehicles, real estate, land and equipment reposessed from bad debtors and classified as assets held for sale with a total carrying amount of UAH 60,575 thousand (2012 - UAH 352,920 thousand of property, property rights and motor vehicles).

13. Investment securities

Investment securities comprise:

2013 2012

Ukrainian State bonds 5,088,329 6,071,228

Ukrainian Corporate bonds 51,574 11,244

Bonds issued by Ukrainian financial institutions 11,374 5,000

Investment securities designated at fair value through profit or loss 5,151,277 6,087,472

Ukrainian State bonds 538,629 922,747

Investment securities held-to-maturity 538,629 922,747

As at 31 December 2013, available-for-sale investment securities comprise corporate shares with a fair value of UAH 1,172 thousand (2012 - UAH 108,163 thousand) and investments in shares of other companies that do not have a quoted market price in any active market and whose fair value cannot be reliably measured. These unquoted equity instruments were fully impaired at 31 December 2013 and 2012 (Note 18).

As at 31 December 2013, Ukrainian State bonds designated at fair value are partially represented by securities issued by the Ministry of Finance of Ukraine whose principal will be indexed only for the increase between the average interbank UAH/USD exchange rate for the month prior to the month of issuance and the average UAH/USD exchange rate for the month prior to the month of maturity. The Bank decided not to separate the embedded derivative and designated the entire instrument as at fair value through profit or loss. As at 31 December 2013, the carrying amount of these bonds comprised UAH 3,141,265 thousand (2012 - UAH 3,572,407 thousand) bearing interest rates of 8.22% - 9.75% (2012 – 8.04% - 9.30%) with maturity from September 2014 to August 2016 (2012 – January 2013 to August 2016).

As at 31 December 2013 Ukrainian State bonds designated at fair value through profit or loss with carrying amount of UAH 321,701 thousand (2012 - UAH 175,464 thousand) were pledged under repurchase agreement with the National Bank of Ukraine (Note 29).

As at 31 December 2013 Ukrainian State bonds designated at fair value through profit or loss with carrying amount of UAH 154,836 thousand (2012 - nil) were pledged under refinancing agreement with the National Bank of Ukraine.



26

14. Investment property

The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements of investment property:

2013 2012

At the beginning of the period 142,487 117,982

Additions 8,640 27,424

Disposals (4,139) -

Transfer from assets held for sale 39,178 -

Revaluation - (2,919)

Changes in the consolidation group 14,392

At the end of the period 200,558 142,487

Valuation of investment property was performed by an independent appraiser as at 1 October 2013. Fair values were determined by reference to market-based evidence. The market approach is based upon an analysis of the results of comparable sales of similar buldings.

The Management believes that the fair value of investment property reflects its market conditions as at 31 December 2013.

The fair values of investment properties are categorised into Level 3 of the fair value hierarchy.

15. Property and equipment

The movements of property and equipment were as follows:

Property

Computers and

equipment

Furniture, fixtures and other assets

Motor vehicles

Construction in progress Total

Cost

31 December 2012 1,554,379 1,517,014 657,378 136,143 11,412 3,876,326

Additions 8,179 116,670 26,862 33,003 63,863 248,577

Disposals (648) (55,410) (21,369) (6,189) (2,656) (86,272)

Transfers 9,923 7,693 1,980 29,662 (49,258) -

Changes in the consolidation group - (262) (191) - - (453)

31 December 2013 1,571,833 1,585,705 664,660 192,619 23,361 4,038,178

Accumulated depreciation

31 December 2012 (10,463) (992,929) (451,554) (75,646) (1,530,592)

Charge for the year (37,671) (172,212) (75,904) (23,461) (309,248)

Disposals 45 54,924 20,574 5,584 81,127

Changes in the consolidation group - 224 179 - 403

31 December 2013 (48,089) (1,109,993) (506,705) (93,523) (1,758,310)

Net book value:

31 December 2012 1,543,916 524,085 205,824 60,497 11,412 2,345,734

31 December 2013 1,523,744 475,712 157,955 99,096 23,361 2,279,868

Property

Computers and

equipment


Motor vehicles

Construction

in progress Total

Cost

31 December 2011 1,696,603 1,396,099 641,852 137,282 15,576 3,887,412

Additions 24,677 145,149 36,190 3,079 18,729 227,824

Disposals (1,403) (26,769) (24,167) (5,086) (1,686) (59,111)

Revaluation (179,799) - - - - (179,799)

Transfers 14,301 2,535 3,503 868 (21,207) -

31 December 2012 1,554,379 1,517,014 657,378 136,143 11,412 3,876,326



27

Property

Computers and

equipment


Motor vehicles

Construction

in progress Total

Accumulated depreciation

31 December 2011 (78,646) (843,324) (393,006) (58,588) (1,373,564)

Charge for the year (41,451) (176,086) (79,579) (21,726) (318,842)

Revaluation 108,408 - - - 108,408

Disposals 1,226 26,481 21,031 4,668 53,406

31 December 2012 (10,463) (992,929) (451,554) (75,646) (1,530,592)

Net book value:

31 December 2011 1,617,957 552,775 248,846 78,694 15,576 2,513,848

31 December 2012 1,543,916 524,085 205,824 60,497 11,412 2,345,734

The latest valuation of buildings was performed by an independent appraiser as at 1 October 2013. Fair values were determined by reference to market-based evidence. The market approach is based upon an analysis of the results of comparable sales of similar buldings.

The Management believes that the fair value of property reflects its market conditions as at 31 December 2013.

The fair values of the Bank’s buildings are categorised into Level 3 of the fair value hierarchy.

As at 31 December 2013, computers and equipment, furniture, capital expenditures, fixtures and other assets, and motor vehicles include assets with a cost of UAH 769,466 thousand which are fully depreciated (2012 - UAH 589,864 thousand).

As at 31 December 2013 and 2012, the Bank had no temporarily idle property and equipment.

If the property were measured using the cost model, the carrying amounts would be as follows:

2013 2012

Cost 807,924 790,051

Accumulated depreciation and impairment (127,552) (111,427)

Net carrying amount 680,372 678,624

16. Intangible assets

The movements of intangible assets were as follows:

Computer

software Licences Total

Cost

31 December 2012 545,988 184,020 730,008

Additions 70,664 38,410 109,074

Disposals (10,568) (12,229) (22,797)

Changes in the consolidation group (159) (96) (255)

31 December 2013 605,925 210,105 816,030

Accumulated amortisation

31 December 2012 (165,505) (57,193) (222,698)

Charge for the year (102,665) (37,216) (139,881)

Disposals 5,567 7,942 13,509

Changes in the consolidation group 120 77 197

31 December 2013 (262,483) (86,390) (348,873)

Net book value:

31 December 2012 380,483 126,827 507,310

31 December 2013 343,442 123,715 467,157



28

Computer

software Licences Total

Cost

31 December 2011 729,565 173,693 903,258

Additions 108,628 34,756 143,384

Disposals (292,205) (24,429) (316,634)

31 December 2012 545,988 184,020 730,008

Accumulated amortisation

31 December 2011 (139,435) (70,035) (209,470)

Charge for the year (134,754) (9,647) (144,401)

Disposals 108,684 22,489 131,173

31 December 2012 (165,505) (57,193) (222,698)

Net book value:

31 December 2011 590,130 103,658 693,788

31 December 2012 380,483 126,827 507,310

As at 31 December 2013, intangible assets include assets with a cost of UAH 4,307 thousand which are fully amortised (2012 - UAH 3,641 thousand).

17. Taxation

The corporate income tax charge comprises:

2013 2012

Current tax charge 230,051 115,056

Deferred tax expense – origination and reversal of temporary differences 23,874 137,982

Income tax expenses 253,925 253,038

Ukrainian legal entities must file individual tax declarations.

According to effective legislation acts, corporate profit tax rate for entities is as follows:

- 23% starting from 1 April 2011; - 21% - from 1 January 2012; - 19% - from 1 January 2013; - 18% - from 1 January 2014; - 17% - from 1 January 2015; - 16% - from 1 January 2016.

Tax loss carry-forward is recognised based on management’s determination that it is probable that sufficient taxable income will be available against which the unused tax losses can be utilised and these tax losses do not expire under current tax legislation.

Deferred tax balances are measured using the tax rates applicable when temporary differences are expected to reverse.

The effective income tax rate differs from the statutory income tax rates. A reconciliation of the income tax expense based on statutory rates with actual is as follows:

2013 2012

Profit before tax 1,271,205 572,305

Statutory tax rate 19% 21%

Theoretical income tax expense at the statutory rate 241,529 120,184

Tax exempt income - (808)

Non-deductible expenses:

- allowances and other provisions 19,732 28,111

- impairment losses on non-current assets 4,508 37,447

- related party transactions 4,435 1,025

- personnel expense 4,337 2,651

- collateral expenses 2,150 4,247

- advertising 1,429 1,838

- other taxes 1,125 2,405



29

2013 2012

- charity 689 1,213

- repair and maintenance 389 204

- other 2,110 3,673

Effect on current income tax caused by different tax rate for securities transactions (6,165) -

Effect of different tax rates application for expected periods of assets’ realisation or liabilities’ settlement (34,307) 77,693

Reassessment of temporary differences 29,698 (32,777)

Income tax of previous periods (9,130) -

Changes in unrecognised deferred tax assets (8,604) 5,932

Income tax expenses 253,925 253,038



30

Deferred tax assets and liabilities as at 31 December and their movements for the respective years comprise:

2011

Origination and reversal of temporary differences

2012

Changes in the

consolidation group

Origination and reversal of temporary differences

In the income statement

In other comprehensive

income

In the income

statement

In other compre-hensive income 2013

Tax effect of deductible temporary differences:

Tax losses carried forward 210,324 (50,517) - 159,807 (1,196) (49,837) - 108,774

Accruals and provisions 142,017 (49,006) - 93,011 - (10,594) - 82,417

Property and equipment, and intangible assets 1,974 13,216 10,012 25,202 - 11,904 - 37,106

Other 990 1,449 - 2,439 - 4,462 - 6,901

Gross deferred tax asset 355,305 (84,858) 10,012 280,459 (1,196) (44,065) - 235,198

Unrecognised deferred tax asset (26,151) (5,615) - (31,766) - 8,135 - (23,631)

Deferred tax asset 329,154 (90,473) 10,012 248,693 (1,196) (35,930) - 211,567

Tax effect of taxable temporary differences:

Allowance for loan impairment (135,925) (75,229) - (211,154) - 42,249 - (168,905)

Valuation of financial instruments except of investment securities 33,761 (22,794) - 10,967 - (16,668) - (5,701)

Valuation of investment securities (48,576) 50,514 (5,481) (3,543) - (13,525) 16,587 (481)

Deferred tax liability (150,740) (47,509) (5,481) (203,730) - 12,056 16,587 (175,087)

Deferred tax asset/(liability) 178,414 (137,982) 4,531 44,963 (1,196) (23,874) 16,587 36,480



31

18. Other impairment and provisions

The movements in allowances for other assets and provisions were as follows:

Investment securities

available-for-sale Other assets

Legal claims, guarantees and

commitments Total

31 December 2011 7,956 63,469 42,033 113,458

Charge/(release) - 27,654 (17,157) 10,497

Write-offs (1,836) (34,166) (1,301) (37,303)

Translation differences - 80 (155) (75)

31 December 2012 6,120 57,037 23,420 86,577

Сharge - 1,033 2,162 3,195

Write-offs - (19,823) (198) (20,021)

Translation differences - 134 97 231

31 December 2013 6,120 38,381 25,481 69,982

The allowance for impairment of assets is deducted from the carrying amounts of the related assets. Provisions for legal claims, guarantees and commitments are recorded in liabilities.

19. Other assets and other liabilities

Other assets comprise other non-financial assets and other financial assets:

2013 2012

Other non-financial assets

Collateral reposessed 265,984 -

Prepayments 67,419 120,804

Precious metals 40,549 67,604

Inventory 17,355 14,709

Other 3,883 10,831

Total other non-financial assets 395,190 213,948

Other financial assets

Transit accounts in respect of transactions with plastic cards 294,387 127,843

Due from employees 25,324 35,367

Receivables for operations with clients 28,462 26,731

Other accrued income 17,000 16,658

Derivative financial instruments (Note 29, 32) 497 -

Other 241 4,897

Total other financial assets 365,911 211,496

Less – allowance for impairment (38,381) (57,037)

Total other assets 722,720 368,407

Other liabilities comprise other non-financial liabilities and other financial liabilities:

2013 2012

Other non-financial liabilities

Remunerations for employees payable 194,577 134,930

Accrual for unused vacation 132,077 131,388

Other accrued expenses 46,063 46,113

Due to Guarantee Fund of Individuals' Deposits 22,813 22,798

Deferred income 21,606 11,631

Payables in respect of property and equipment, and intangible assets 16,552 7,935

Other taxes payable 10,385 12,776

Payables for leased equipment 574 8,107

Other liabilities - 4,948

Total other non-financial liabilities 444,647 380,626

Other financial liabilities

Transit accounts for transactions with customers 95,633 172,295

Derivative financial instruments (Note 29) 8,203 171



32

2013 2012

Other financial liabilities 24,971 20,506

Total other financial liabilities 128,807 192,972

Total other liabilities 573,454 573,598

20. Amounts due to credit institutions

Amounts due to credit institutions comprise:

2013 2012

Current accounts of other banks 210,182 319,378

Time deposits and loans from other banks:

Short-term 519,743 639,274

Long-term 6,978,324 10,902,377

Long-term loans due to international financial organisations - 80,733

Amounts due to credit institutions 7,708,249 11,941,762

For the purpose of cash flow statement presentation Bank segregates funds attracted from credit institutions into operating and financing activities. Current accounts and short-term time deposits and loans from other banks are included in operating activity; long-term time deposits and loans from other banks and loans due to international financial organisations are included in financing activity.

21. Amounts due to customers

Amounts due to customers comprise:

2013 2012

Current accounts 17,167,713 14,547,809

Time deposits 9,664,931 13,416,225

Amounts due to customers 26,832,644 27,964,034

Held as security against letters of credit and guarantees (Note 25) 245,535 45,070

Amounts due to customers per businesses:

2013 2012

Public sector 75,771 27,914

Corporate 8,368,802 8,803,671


Private Individuals 14,219,327 14,646,897

Micro Customers 2,997,517 3,219,767


As at 31 December 2013, time deposits due to legal entities include UAH 499,260 thousand (2012 – UAH 2,154,998 thousand) due to five legal entities.

In 2013 the State Statistics Service of Ukraine updated the classification of economic sectors. As at 31 December 2013 the Bank used new classification for customer accounts analysis. Comparative figures as at 31 December 2012 were also changed in accordance with transition matrix proposed by the State Statistics Service of Ukraine and judgement applied for comparability of data disclosed.



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An analysis of customer accounts by economic sector is as follows:

2013 2012

Individuals 14,219,327 14,646,897

Trade 3,578,350 3,123,654

Mining and Metallurgy 1,920,547 2,626,024

Agriculture 1,612,031 2,315,316

Manufacturing 748,105 784,961

Machine building 739,793 592,846

Media and IT 579,770 527,653

Social infrastructure 570,333 493,622

Real estate constructions 505,944 446,541

Financial services 436,040 512,116

Consulting 340,084 599,364

Transport and communication 306,223 574,338

Chemical 286,349 175,539

Real estate services 265,976 208,444

Other 723,772 336,719


22. Debt securities issued

As at 31 December 2013, the Bank had in issue interest-bearing debentures having an aggregate carrying value of UAH 70,160 thousand (2012 - UAH 37,514 thousand) maturing in 2014 bearing annual interest rate of 16% (2012 – maturity in 2013 bearing annual interest rate of 16%).

23. Subordinated debt

In February 2005, the Bank obtained a loan amounting to USD 20,000 thousand (equivalent of UAH 105,982 thousand as at date of issue) from an international financial institution. This loan matures in December 2015. Interest payments at LIBOR + 3% annual interest rate are made semi-annually in arrears on 15 June and 15 December of each year.

In August 2005, the Bank obtained a loan amounting to USD 50,000 thousand (equivalent of UAH 252,500 thousand as at date of issue) from the same international financial institution. This loan matures in December 2015. Interest payments at LIBOR + 3% annual interest rate are made semi-annually in arrears on 15 December and 15 June of each year.

In December 2008, the Bank obtained a loan amounting to USD 75,000 thousand (equivalent of UAH 577,500 thousand as at date of issue) from another international financial institution. This loan matures in January 2019. Interest payments at LIBOR + 10% annual interest rate are made semi-annually in arrears on 5 January and 5 July of each year.

In November 2009, the Bank obtained a loan amounting to USD 150,000 thousand (equivalent of UAH 1,197,090 thousand as at date of issue) from the same international financial institution. This loan matures in December 2019. Interest payments at LIBOR + 1.9% annual interest rate are made semi-annually in arrears on 2 December and 2 June of each year.

The carrying value of the subordinated debt as at 31 December 2013 is UAH 2,377,704 thousand (2012 – UAH 2,374,272 thousand).

24. Equity

Share capital

As at 31 December 2013, the Bank’s authorised issued share capital comprised 29,977,749,080 ordinary shares and 50,000,000 preference shares (2012 – 29,977,749,080 ordinary shares and 50,000,000 preference shares), with a nominal value of UAH 0.10 per share.

All ordinary shares have equal voting rights and equal legal rights for dividends and equity return. Preference shares do not have voting rights and are entitled to fixed dividends of UAH 0.014 per share.



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The movements in share capital for the years ended 31 December 2013 and 2012 were as follows:

Number of shares fully

paid, ‘000 Nominal amount, UAH

‘000 Inflation

adjustment, UAH ‘000

Restated cost, UAH

'000 Ordinary Preference Ordinary Preference

31 December 2011 29,973,667 49,995 2,997,367 4,999 80,875 3,083,241

Purchase of treasury shares (13,344) (37) (1,334) (4) - (1,338)

Sale of treasury shares 15,433 28 1,543 3 - 1,546

31 December 2012 29,975,756 49,986 2,997,576 4,998 80,875 3,083,449

Sale of treasury shares 1,994 14 199 2 - 201

Transfer of inflation adjustment - - - - (80,875) (80,875)

31 December 2013 29,977,750 50,000 2,997,775 5,000 - 3,002,775

The movements in share capital presented in the table above had no impact on the authorised issued share capital.

At the Shareholders’ meeting on 25 April 2013 (12 April 2012), the dividends in amount UAH 700 thousand were declared in respect of the year ended 31 December 2012 on the preference shares (2012 – UAH 700 thousand in respect of the year ended 31 December 2011).

During the year 2013 the Bank brought its share capital to the historical cost amount as registered with local regulatory and filing authorities by transferring UAH 80,875 thousand from share capital to retained earnings. UAH 80,875 thousand represent an adjustment made by the Bank to share capital during years of hyperinflation in accordance with IAS 29.

The share capital of the Bank was contributed in Ukrainian hryvnia and the shareholders are entitled to dividends and any capital distributions in Ukrainian hryvnia.

Additional paid-in capital

Additional paid-in capital includes amount of funds received in excess of the nominal value of treasury shares sold by the Bank.

Revaluation reserves

Movements in revaluation reserves were as follows:

Revaluation reserve for

property

Revaluation results on investment securities

available-for-sale Total

31 December 2011 1,096,978 58,307 1,155,285

Other comprehensive income

Revaluation of property (62,574) - (62,574)

Income tax relating to revaluation of property 10,012 - 10,012

Unrealised gains on investments securities available-for-sale - 34,258 34,258

Income tax relating to gains on investment securities available-for-sale - (5,481) (5,481)

Total other comprehensive income (52,562) 28,777 (23,785)

Depreciation of revaluation reserve (23,848) - (23,848)

Transfer of tax effect from revaluation of property (31,494) - (31,494)

31 December 2012 989,074 87,084 1,076,158

Other comprehensive income Сhange in fair value on investment securities available-for-sale transferred to profit or loss - (103,671) (103,671)

Income tax relating to gains on investment securities available-for-sale - 16,587 16,587

Total other comprehensive income - (87,084) (87,084)

Depreciation of revaluation reserve (23,533) - (23,533)

Transfer of revaluation upon disposal of property (894) - (894)

31 December 2013 964,647 - 964,647



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Nature and purpose of other reserves

Revaluation reserve for property

The revaluation reserve for property is used to record increases in the fair value of buildings and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.

Revaluation results on investment securities available-for-sale

This reserve reflects fair value changes on available-for-sale investments.

Reserve and other funds

Allocation and usage of reserves and other funds is determined at Annual General Meeting of shareholders.

The Bank is required to reserve 5% of its annual profit after tax created according to valid legislation of Ukraine until this mandatory reserve balance reaches 25% of the Bank’s charter capital. The reserve may also be created from retained earnings for prior years.

In 2013 reserve fund of the Bank was increased by UAH 2,763 thousand, or 5% of profit in financial year 2012 created according to valid legislation of Ukraine (2012: UAH 1,533 thousand).

25. Commitments and contingencies

Taxation

Ukrainian legislation and regulations regarding taxation and other operational matters continue to evolve as a result of an economy in transition. Legislation and regulations are not always clearly written and their interpretation is subject to varying interpretations by local, regional and national authorities, and other Governmental bodies. Instances of inconsistent interpretations are not unusual. Management believes that the Bank and its subsidiaries have complied with all regulations and paid or accrued all taxes that are applicable. Where the risk of outflow of resources is probable, the Bank and its subsidiaries have accrued tax liabilities based on management’s best estimate.

The Bank’s operations and financial position will continue to be affected by Ukrainian political developments including the application of existing and future legislation and tax regulations. Management of the Bank believes that obligations that could arise as a result of these contingencies, as relating to its operations, would not be more significant than those of similar enterprises in Ukraine.

Tax loss carry-forward is recognised based on management’s determination that it is probable that sufficient taxable income will be available against which the unused tax losses can be utilized. These tax losses do not expire under current tax legislation. However, pursuant to changes in Tax Code introduced in 2012 the Bank’s accumulated tax losses carried forward as at 31 December 2011 may be utilized with certain limitations. The annual limit of utilisation of these tax losses during the period of 2012-2015 comprises 25% of their balance as at 31 December 2011. Starting from 2016, any unutilized and newly generated tax losses can be utilised in full provided sufficient taxable profit is available. Additionally, starting 1 January 2013, gains on operations with securities are taxable at a rate of 10%.

As at 31 December 2013 management believes that its interpretation of the provisions mentioned above is appropriate.

Legal matters

In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Bank and its subsidiaries.

The Bank’s financial commitments and contingencies comprise the following:

2013 2012

Guarantees 2,316,536 1,320,641

Letters of credit 261,026 207,455

Avals on promissory notes 134,251 144,407

2,711,813 1,672,503

Less – Provisions (15,751) (16,711)

Financial commitments and contingencies (before deducting collateral) 2,696,062 1,655,792

Less – Cash held as security against guarantees, letters of credit, avals and prommisory notes (245,535) (45,070)

Financial commitments and contingencies 2,450,527 1,610,722



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The future minimum payments under the non-cancellable operating lease agreements are as follows:

2013 2012

Less than 1 year 138,695 150,834

Between 1 and 5 years 99,034 132,458

More than 5 years 30,244 28,156

Future minimum lease payments 267,973 311,448

Financial covenants

As at 31 December 2013, the Bank did not comply with a covenant embedded in one of Subordinated Loan agreements in respect of the obligation to maintain an Open Credit Exposure Ratio of not more than 25%. Such non-compliance may lead to accelerated repayment, at lender’s discretion and demand, of the outstanding facility subject to the NBU consent. As a result, the subordinated loan is presented as current liability as at 31 December 2013.

As at the date these consolidated financial statements are authorised for issue, the lender did not request accelerated repayment of the subordinated loan, nor the breach of covenant was remedied.

26. Net fee and commission income

Fee and commission income comprise:

2013 2012

Cash and settlement operations with customers 1,349,697 1,260,300

Currency conversion 129,329 114,639

Agency services for third party products 107,686 86,492

Operations with guarantees, letters of credit and avals on promissory notes 60,757 49,543

Cash and settlement operations with banks 33,555 33,157

Other 23,112 18,824

Fees and commission income 1,704,136 1,562,955

Cash and settlement operations (306,182) (208,042)

Commission paid for loan services (11,320) (9,294)

Commission for operations with guarantees, letters of credit (794) (334)

Other (25,714) (22,147)

Fees and commission expenses (344,010) (239,817)

Fees and commissions, net 1,360,126 1,323,138

27. Other income

2013 2012

Penalties charged 48,350 28,834

Operating lease income 17,168 14,616

Charges from other operating income 14,987 20,110

Additional revenues from leasing services 6,714 11,178

Gains from sale of loans 4,949 -

Recoveries on written-off receivables 262 17

Other 4,270 6,830

Total other income 96,700 81,585



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28. Personnel and other administrative and operating expenses

Personnel other administrative and operating expenses comprise:

2013 2012

Salaries and bonuses 1,167,337 1,171,864

Employment taxes 345,978 371,624

Personnel expenses 1,513,315 1,543,488

Occupancy and rent 267,781 273,508

Repair and maintenance expenses 225,479 235,529

Expenses related to Guarantee Fund of Individuals' Deposits 94,313 80,146

Expenses for cash collection 62,142 53,287

Office expenses 52,898 51,142

Electronic data processing costs 42,135 42,305

Communications 39,423 39,415

Legal and consultancy 37,598 37,372

Marketing and advertising 37,083 38,136

Operating taxes 36,196 36,161

Security 30,154 27,353

Business travel and related expenses 14,670 14,900

Insurance expenses 14,283 17,647

Impairment of tangible and intangible assets 11,898 186,593

Licences and royalties 9,332 4,146

Leasing business related expenses 5,991 3,121

Employee training 5,406 5,710

Charity 4,981 5,871

Penalties incurred 1,004 976

Loss on fixed asset disposals 263 615

Other 23,251 29,037

Other administrative and operating expenses 1,016,281 1,182,970

29. Risk management

Introduction

Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.

The Bank is exposed to financial risks (credit, liquidity, and market risks) and non-financial risks (legal, operational, and other risks).

Risk management structure

The Supervisory Board is ultimately responsible for finally setting and approving the Bank’s risk and capital objectives. However, there are separate independent departments responsible for managing and monitoring risks.

Management Board

The Management Board of Raiffeisen Bank Aval is responsible for proposing and implementing all of the Bank’s risk and capital targets as well as for overall risk management, control and implementing Raiffeisen Bank International risk management policies throughout the Bank. Regular risk management reports and on-going risk analysis provide a sound basis for the members of the Management Board to decide which procedures are relevant in identifying, measuring and minimising of risks.

Credit Committee

The Credit Committee bears the overall responsibility for the development of credit risk management strategy and implementing related principles, frameworks, policies and limits. It is responsible for fundamental risk issues, manages and monitors relevant risk decisions. It is also responsible for individual limit approvals within limits set by the Bank’s Supervisory Board. All lending authority within the Bank is derived from the Credit Committee.



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The Assets and Liabilities Management Committee

The Assets and Liabilities Management Committee (the “ALCO”) manages the Bank’s assets and liabilities in accordance with Ukrainian legal and regulatory environment and the RBI standards, and is responsible for maintaining a balance between risk and profit. It also supports an appropriate system of effective risk management.

Risk Management

The Bank has established a Risk Management division, which is independent of the business lines and is responsible for implementing and maintaining risk related procedures to ensure an independent control process.

Bank’s Treasury

The Bank’s Treasury is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the liquidity and funding risks of the Bank.

Internal audit

Risk management processes throughout the Bank are audited periodically by Internal Audit, which examines both the adequacy of the procedures and the Bank’s compliance with the procedures.

Risk measurement and reporting systems

The Bank performs regular risk control and identification procedures based on the NBU recommendations as well as on the RBI AG experience. The key principle of risk minimisation is the setting and control of limits. The limit system is based on the NBU regulatory ratios and limits established within RBI AG. The information relating to risks in the various business lines of the Bank is communicated to the respective divisions of the Bank, in particular to the Treasury and the Treasury Coordination and Asset Liability Management Committee in the RBI AG head office in Vienna. The majority of risk reports are prepared on a daily basis, most of them are also presented at the ALCO meetings.

Risk mitigation

The Bank often requests the clients to provide collateral to mitigate credit risk. The use of collateral to secure a loan enables the Bank to control assets in the event of default of a borrower. Collateral represents a potential source for repayment of a loan. However, the Bank’s decision to lend is not limited to the availability of solid collateral or a guarantee. Each decision to issue a loan to a borrower is supported by a comprehensive credit analysis that mitigates the credit risk and enhances the quality of the Bank’s credit portfolio.

Maximum credit risk exposure and financial effect of collateral

Maximum credit exposures and financial effect of collateral are presented in the table below:

Net exposure 2013

Weighted Collateral Value 2013


Loans to customers:

Corporate 19,581,320 11,567,659


Private individuals 7,513,133 3,997,223

Micro customers 1,841,843 506,664

Total 31,100,184 17,840,844

Net exposure

2012 Weighted Collateral Value

2012

Amounts due from credit institutions 3,525 -

Loans to customers:

Corporate 17,291,115 10,272,673


Private individuals 8,366,693 5,257,602

Micro customers 1,866,407 377,350

Total 29,816,723 17,848,634

Information disclosed in the tables above is based on Weighted Collateral Value (WCV), which is equal to fair value discounted according to internal Bank's policies. Value of collateral reflects the amount the Bank expects to receive in case of forced collateral realization. In calculation of WCV the Bank takes the value of collateral for each loan agreement based on the lower of carrying value of loans and value of collateral so that to exclude the effect of over-collateralization. For different types of collateral different discounts are applied according to the Bank’s policies.



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The Bank undertakes a number of measures to ensure the repayment of loans. After issuing a loan, the Risk Management Division is responsible for loan administration. This involves continuous monitoring of the financial position of the borrower, its compliance with financial covenants set up by the loan agreement, as well as seeking new opportunities for collaboration with clients. Credit monitoring provides for earlier detection of indications that the borrower may face financial difficulties in loan repayment. It is performed in the early stages in order to maximise the effect of the Bank’s corrective actions and reduce possible losses.

Excessive risk concentration

Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location. Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Key elements of effective management to avoid excessive risk concentration are well-developed credit policies and procedures aimed at maintaining a diversified loan portfolio. The whole process of loan management is performed under established credit policy. There were no significant concentrations in the loan portfolio of the Bank as at 31 December 2013 and 2012.

Credit risk

Credit risk is the risk that the Bank will incur a loss because its borrowers, clients or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular reviews of collateral. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process allows the Bank to assess the potential loss as a result of the risks to which it is exposed and take corrective action.

In assessment of credit quality of loans to customers the Bank performs segmentation of loan portfolio as described below:

- Corporate – segment includes loans granted by the Bank to large corporate clients;

- Small Enterprises – segment includes loans granted by the Bank to small and medium businesses;

- Private Individuals segment includes loans granted by the Bank to private individuals;

- Micro Customers - segment includes loans granted by the Bank to corporate clients, which is not included in the segment of Corporate and Small Enterprises segments by the volume of revenues generated and amount of loans granted as defined by internal regulations of the Bank.

Segmentation of portfolio of the Bank between categories Corporate and Small Enterprises is based on the volume of revenues generated by clients and amount of loan granted as defined by internal regulations of the Bank.

Credit-related commitments risks

The Bank makes available to its customers guarantees under which the Bank may be required to make payments on their behalf. Such payments are collected from customers based on the terms of guarantees. Guarantees issued bear similar risk exposure for the Bank as loans issued and, consequently, are mitigated by the same control processes and policies.

The maximum exposure to credit risk for the components of the consolidated statement of financial position, after the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts.

Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

In the table below loans to banks of high grade are those having level of credit risk, normally with a credit rating on or close to sovereign level. Other banks with good financial position and good debt service are included in the standard grade. The sub-standard grade comprises loans below standard grade but not individually impaired.

For investment securities, the Bank uses its own internal risk rating policy, where high grade securities are those having a minimal level of credit risk, other securities with low risk are included into the standard grade and securities with high risk but not individually impaired are included into the sub-standard grade.



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Credit quality by class of financial assets

The credit quality of financial assets is managed based on the Bank’s internal credit ratings. The table below shows the cred it quality by class of asset for loan-related consolidated statement of financial position lines.

Neither past due nor impaired Past due and individually

impaired 2013

Total 2013 Notes

High grade 2013

Standard grade 2013

Sub-standard grade 2013

No grade loans 2013

Cash and cash equivalents: 7

Current accounts with other credit institutions 806,736 - - - - 806,736

Time deposits with credit institutions up to 90 days 50,443 - - - - 50,443

857,179 - - - - 857,179

Amounts due from credit institutions 10 30,271 - - - - 30,271

Loans to customers: 11

Corporate 821,796 10,275,920 6,876,586 15,195 4,446,697 22,436,194

Small Enterprises 195,821 320,337 1,023,200 59,827 1,521,153 3,120,338

Private Individuals - - - 5,336,846 6,610,501 11,947,347

Micro Customers - - - 1,667,137 494,922 2,162,059

1,017,617 10,596,257 7,899,786 7,079,005 13,073,273 39,665,938

Debt investment securities: 13

Designated at fair value through profit or loss 5,151,277 - - - - 5,151,277

Held-to-maturity 538,629 - - - - 538,629

5,689,906 - - - - 5,689,906

Total 7,594,973 10,596,257 7,899,786 7,079,005 13,073,273 46,243,294



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Neither past due nor impaired Past due and individually

impaired 2012

Total 2012 Notes

High grade 2012

Standard grade 2012

Sub-standard grade 2012

No grade loans 2012

Cash and cash equivalents: 7

Current accounts with other credit institutions 4,978,358 29,740 - - - 5,008,098

Time deposits with credit institutions up to 90 days 114,058 - - 100 - 114,158

5,092,416 29,740 - 100 - 5,122,256

Amounts due from credit institutions 10 - 3,525 - - - 3,525

Loans to customers: 11

Corporate 1,021,397 7,661,902 6,422,767 5,157 5,220,882 20,332,105

Small Enterprises 14,311 46,540 1,247,886 55,490 2,098,481 3,462,708

Private Individuals - - - 5,479,364 7,644,867 13,124,231

Micro Customers - - - 1,627,042 543,817 2,170,859

1,035,708 7,708,442 7,670,653 7,167,053 15,508,047 39,089,903

Debt investment securities: 13

Designated at fair value through profit or loss 6,087,472 - - - - 6,087,472

Held-to-maturity 922,747 - - - - 922,747

7,010,219 - - - - 7,010,219

Total 13,138,343 7,741,707 7,670,653 7,167,153 15,508,047 51,225,903



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New Regular Corporate and Large Corporate Rating models

In 2013 the Bank implemented new rating model for the credit risk evaluation purposes.

The main changes of the new rating model affecting the calculation of allowance for impairment of loans to customers are listed below:

- Graduation of corporate rating model increased from 9 to 25 grades;

- Corporate customers are divided into two different categories, depending on the amounts of revenues and total assets: Regular Corporate and Large Corporate rating models;

- Implementation of special Project Finance Rating model for real estate financing projects, where the performance of the underlying project is the primary source of debt servicing.

Implementation of the changes listed above did not have a significant impact on the amount of allowance for impairment of loans to customers.

Ageing analysis of past due but not impaired loans by class of financial asset

Less than 30 days

2013

31 to 60 days 2013

61 to 90 days 2013

More than 90 days

2013 Total 2013

Loans to customers:

Corporate 256,355 32,620 181,378 - 470,353

Small Enterprises 125,508 15,756 3,126 680 145,070

Private Individuals 471,689 119,478 85,369 180,468 857,004

Micro Customers 48,980 15,039 13,993 13,990 92,002

Total 902,532 182,893 283,866 195,138 1,564,429

Less than 30 days

2012

31 to 60 days 2012

61 to 90 days 2012

More than 90 days

2012 Total 2012

Loans to customers:

Corporate 602,965 54,451 50,963 - 708,379

Small Enterprises 157,865 88,835 44,305 - 291,005

Private Individuals 547,492 157,731 106,397 211,483 1,023,103

Micro Customers 43,393 23,891 15,320 18,745 101,349

Total 1,351,715 324,908 216,985 230,228 2,123,836

For more detailed information with respect to the allowance for impairment of loans to customers, please refer to Note 11.

Impairment assessment

For accounting purposes, the Bank uses an incurred loss model for the recognition of losses on impaired financial assets. This means that losses are only recognised when objective evidence of a specific loss event has been observed.

The main considerations for the loan impairment assessment include:

- whether any payments of principal or interest are overdue by more than 90 days for Corporate and Small Enterprises, by more than 180 days for Private Individuals and Micro Customers; or

- there are any known difficulties in the cash flows of counterparties; or

- credit rating downgrades; or

- infringement of the original terms of the contract.

The Bank addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances.

Individually assessed allowances

The Bank determines the allowances appropriate for each individually significant loan on an individual basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected dividend payout should bankruptcy ensue, the availability of other financial support and the realisable value of collateral, and the



43

timing of the expected cash flows. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans to customers that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans where there is not yet objective evidence of individual impairment. Allowances are evaluated on each reporting date with each portfolio receiving a separate review.

The collective assessment takes account of impairment that is likely to be present in the portfolio even though there is not yet objective evidence of the impairment in an individual assessment. Impairment losses are estimated by taking into consideration the following information: historical losses on the portfolio, current economic conditions, the appropriate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance, and expected receipts and recoveries once impaired. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy.

Financial guarantees and letters of credit are assessed and provision made in a similar manner as for loans to customers.



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The geographical concentration of Bank’s financial assets and financial liabilities is set out below:

2013 2012

Ukraine OECD Non OECD Total Ukraine OECD Non OECD Total

Assets:

Cash and cash equivalents 4,976,661 672,052 85,562 5,734,275 4,835,278 4,824,973 113,546 9,773,797

Mandatory reserves in the National Bank of Ukraine 576,312 - - 576,312 526,494 - - 526,494

Trading securities 210,622 - - 210,622 204,540 - - 204,540

Amounts due from credit institutions - 30,271 - 30,271 3,525 - - 3,525

Loans to customers 31,067,764 1,678 471 31,069,913 29,734,119 1,247 77,832 29,813,198

Investment securities:

- designated at fair value through profit or loss 5,151,277 - - 5,151,277 6,087,472 - - 6,087,472

- held-to-maturity 538,629 - - 538,629 922,747 - - 922,747

Other financial assets 365,909 1 1 365,911 211,496 - - 211,496

Total assets 42,887,174 704,002 86,034 43,677,210 42,525,671 4,826,220 191,378 47,543,269

Liabilities:

Amounts due to the National Bank of Ukraine 402,137 - - 402,137 150,586 - - 150,586

Amounts due to credit institutions 505,662 7,013,446 189,141 7,708,249 730,573 11,101,519 109,670 11,941,762

Amounts due to customers 26,693,071 97,975 41,598 26,832,644 27,804,226 91,054 68,754 27,964,034

Debt securities issued 70,160 - - 70,160 37,514 - - 37,514

Current income tax liabilities 95,762 - - 95,762 67,868 - - 67,868

Subordinated debt - 2,377,704 - 2,377,704 - 2,374,272 - 2,374,272

Provisions 15,630 145 9,706 25,481 19,408 2,980 1,032 23,420

Other financial liabilities 118,958 8,297 1,552 128,807 190,671 572 1,729 192,972

Total liabilities 27,901,380 9,497,567 241,997 37,640,944 29,000,846 13,570,397 181,185 42,752,428

Net balance sheet position 14,985,794 (8,793,565) (155,963) 6,036,266 13,524,825 (8,744,177) 10,193 4,790,841

Net off-balance sheet position (Note 25) 2,388,365 18,496 289,201 2,696,062 1,362,317 19,520 273,955 1,655,792



45

Liquidity Risk and Funding Management

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. Liquidity risk includes the inability to manage the unplanned reduction or changes in funding sources. Liquidity risk also arises as a result of an inability to identify or consider changes in the market conditions, which affect the ability to promptly dispose of assets with the minimum loss of their value.

Liquidity management is aimed at achieving an adequate level of liquid assets and maintenance of a diversified resource base as well as compliance with the banking laws and regulations relating to the management of liquidity risk.

To ensure effective liquidity management, the Bank manages both assets and liabilities. The main funding bases include the following:

- for Ukrainian hryvnia funding: non-banking (client) deposits supplemented by money market deposits and proceeds from local currency bonds, focusing on the development of the client deposit base with a particular emphasis on retail deposits;

- for foreign currency funding: medium- and long-term interbank loans (including loans from international financial institutions) supplemented by non-banking deposits.

In order to ensure proper liquidity risk assessment, the Bank monitors its liquidity position on a regular basis. An analysis of the term structure of asset and liabilities is the main approach for liquidity risk estimation. On a daily basis, reports that contain information relating to the remaining maturity of all balance sheet items are calculated. The Bank considers that product distribution according to remaining maturity does not reflect real future cash flows. Analysis of product dynamics is performed. Based on the results of such analysis, the Bank develops special liquidity scenarios. In addition, special liquidity stress tests are developed, in particular financial crisis and name (reputational) crisis scenarios are defined.

The Bank has established limits on liquidity gaps for separate time buckets and controls them on regular basis.

Additionally, sources of counterbalancing capacity (e.g., Government bonds and Certificates of Deposit issued by the National Bank of Ukraine) are investigated.

The Bank also monitors liquidity ratios established by the NBU on a daily basis and, if necessary, provides stress testing and scenario analysis. As at 31 December 2013 and 2012, these ratios calculated in accordance with reguirements were as follows:

2013, % 2012, %

N4 “Instant Liquidity Ratio” (cash and balances on current accounts /

liabilities repayable on demand) (minimum required by the NBU – 20%) 30.40 62.77 N5 “Current Liquidity Ratio” (assets receivable or realisable within 31 days /

liabilities repayable within 31 days) (minimum required by the NBU – 40%) 73.79 79.96 N6 “Short-term Liquidity Ratio” (certain assets with original maturity up to 1

year / liabilities with original maturity up to 1 year including commitments and contingencies) (minimum required by the NBU 60%) 83.11 80.58

Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Bank’s financial liabilities at 31 December 2013 and 2012 based on contractual undiscounted repayment obligations:

Financial liabilities as at 31 December 2013

Less than 3 months

3 to 12 Months

1 to 5 years

Over 5 years Total

Amounts due to the National Bank of Ukraine 405,023 - - - 405,023

Amounts due to credit institutions 1,141,246 3,384,355 3,524,534 - 8,050,135

Amounts due to customers 22,419,514 4,610,896 45,034 5,022 27,080,466

Debt securities issued - - 71,650 - 71,650

Subordinated debt 50,068 692,174 650,640 1,929,568 3,322,450

Other financial liabilities 128,807 - - - 128,807

Total undiscounted financial liabilities 24,144,658 8,687,425 4,291,858 1,934,590 39,058,531



46

Financial liabilities as at 31 December 2012

Less than 3 months

3 to 12 Months

1 to 5 years

Over 5 years Total

Amounts due to the National Bank of Ukraine 152,837 - - - 152,837

Amounts due to credit institutions 5,320,510 4,376,378 2,326,659 - 12,023,547

Amounts due to customers 20,937,558 7,291,212 54,876 7,595 28,291,241

Debt securities issued 961 38,956 - - 39,917

Subordinated debt 17,148 76,413 953,802 1,946,212 2,993,575

Other financial liabilities 192,524 448 - - 192,972

Total undiscounted financial liabilities 26,621,538 11,783,407 3,335,337 1,953,807 43,694,089

Included in due to customers are term deposits of individuals. In accordance with Ukrainian legislation, the Bank is obliged to repay such deposits on demand of a depositor. These balances are included in disclosures above in accordance with their contractual maturity (that means individuals are not expected to demand deposits before contractual maturity). Significant portion of deposits of individuals are short-term by nature and are included in maturity period “Less than 3 months” in the disclosures above.

Total amount of deposits of individuals excluding amount of accrued interest and undiscounted future cash flows included in maturity period “3 – 12 months” is UAH 4,232,045 thousand (2012 - UAH 4,957,374 thousand). However, the Bank expects that many customers will not request repayment on the earliest date that the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history. See Note 31 “Maturity analysis of assets and liabilities” for the Bank’s analysis of assets and liabilities according to when they are expected to be recovered or settled.

The table below shows the contractual expiry by maturity of the Bank’s financial commitments and contingencies.

Less than 3

months 3 to 12

months 1 to 5 years Over 5 years Total

2013 983,849 1,258,830 469,090 44 2,711,813

2012 455,753 1,129,541 87,116 93 1,672,503

The Bank expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

Issued guarantees and avals on promissory notes commit the Bank to make payments on behalf of customers in the event of a specific act and thus may be required to be paid immediately before expiry of maturity of these commitments.

Offsetting financial assets and financial liabilities

The tables below shows financial assets and financial liabilities subject to offsetting as at 31 December 2013 and 2012 (Note 19):

2013

Type of financial assets/liabilities

Gross amount of

recognised financial

assets

Gross amount of

recognised financial liabilities

Net amount of financial

assets/(liabilities) presented in the

statement of financial position

Carrying amount in the statement

of financial position

Forward (Note 32) 24,861 (24,364) 497 497

Derivative financial assets 24,861 (24,364) 497 497

Swaps (Ukrainian banks) 279,738 (287,356) (7,618) (7,618)

Spots (Foreign banks) 161,326 (161,911) (585) (585)

Derivative financial liabilities 441,064 (449,267) (8,203) (8,203)

2012

Type of financial assets/liabilities

Gross amount of

recognised financial

assets

Gross amount of

recognised financial liabilities

Net amount of financial

assets/(liabilities) presented in the

statement of financial position

Carrying amount in the statement

of financial position

Spots (Foreign banks) (Note 32) 99 054 (99 225) (171) (171)

Derivative financial liabilities 99 054 (99 225) (171) (171)

As at 31 December 2013 and 2012 contractual maturities of gross amounts of the Bank's derivative financial instruments are less than 3 months.



47

The tables below show transferred financial assets that are not derecognized in their entirety:

As at 31 December 2013

Ukrainian State bonds designated at fair value under sale and

repurchase agreements

Amount due to the National Bank of Ukraine under sale and


Gross amount of recognised financial instruments 321,701 302,137

Amounts offset in accordance with IAS 32 offsetting criteria - -

Amounts that do not qualify for offsetting 321,701 302,137

Carryng amount presented in the statement of financial position 321,701 302,137

As at 31 December 2012

Ukrainian State bonds designated at fair value under sale and


Amount due to the National Bank of Ukraine under sale and


Gross amount of recognised financial instruments 175,464 150,586

Amounts offset in accordance with IAS 32 offsetting criteria - -

Amounts that do not qualify for offsetting 175,464 150,586

Carryng amount presented in the statement of financial position 175,464 150,586

Market risk

Market risks are the risks related to potential losses due to fluctuations in various market factors (e.g. interest rates, exchange rates, security quotes, etc.). Market risk arises both from consolidated statement of financial position items and commitments and contingencies positions for trading and banking (investment) books. The Bank applies various methods and approaches for market risk estimation and control, in particular, sensitivity analysis to interest rates shifts (Basis Point Value) and open position monitoring are used. In addition, the Bank has implemented a Value-at-Risk (“VaR”) approach based on internal model. The model is based on a simulation of scenarios using the Monte-Carlo method, and the Bank considers that this model is more representative of the national market environment.

Interest rate risk

Interest rate risk arises from the possibility that unexpected and adverse changes in interest rates will affect future cash flows or the fair values of financial instruments.

The Bank uses various methods and approaches for interest rate risk analysis. The asset-liability interest rate gap is the primary method for interest rate risk analysis. The Bank has the ability to generate the appropriate report on a daily basis. For the investment portfolio, the sensitivity to parallel yield curve shifts is evaluated. Additionally, the Bank studies the yield curve impact on profit before tax. The Bank establishes special sensitivity limits and monitors them on a regular basis.

The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Bank’s consolidated income statement.

The sensitivity of the net interest income is the effect of the assumed changes in interest rates on the profit before tax for one year, based on the non-fixed rate non-trading financial assets and financial liabilities held at 31 December 2013 and 2012. The effect on equity does not differ from the effect on the consolidated income statement.

Currency

Increase in basis points

2013

Sensitivity of net interest income

2013

Increase in basis points

2012


2012

Ukrainian hryvnia +96bp 10,219 +134bp (18,109)

Euro +21bp 1,855 +17bp 2,498

US dollars +23bp (15,429) +33bp (6,122)



48

Currency

Decrease in basis points

2013


2013

Decrease in basis points

2012


2012

Ukrainian hryvnia -96bp (9,784) -134bp 18,109

Euro -21bp 18 -17bp (1,272)

US dollars -23bp 2,874 -33bp 17,881

Currency risk

Currency risk is the risk caused by unfavourable and unexpected fluctuations of currency rates has a potential influence on the Bank’s profitability and capital. To ensure an acceptable level of currency risk, the Bank establishes limits on open foreign exchange positions for all currencies and precious metals and monitors their application on a daily basis. VaR limits for currency risk and the influence of underlying market factors are regularly studied. If necessary, the Bank performs a scenario analysis of the impact of currency rate fluctuations on the consolidated income statement, capital and liquidity.

The tables below indicate the currencies to which the Bank had significant exposure on its monetary assets and liabilities and its forecasted cash flows as at 31 December 2013 and 2012. The analysis calculates the effect on the consolidated income statement of a reasonable possible movement of the currency rate against the Ukrainian hryvnia, whereas all other variables held constant (due to the fair value of currency sensitive monetary assets and liabilities). The effect on equity does not differ from the effect on the consolidated income statement.

The negative amounts in the table reflect the potentially possible decrease of the net interest income or equity; meanwhile the positive amounts reflect the potentially possible increase.

Currency

Increase in currency rate in %

2013

Effect on profit before tax

2013

Increase in currency rate in %

2012


2012

US dollars 0.52% 35,671 0,47% (5,017)

Euro 1.45% 418 0,28% 202

Russian rouble 1.95% 1,360 2,14% 534

Currency

Decrease in currency rate in %

2013


2013

Decrease in currency rate in %

2012


2012

US dollars 0.55% (38,767) 0,44% 4,599

Euro 1.77% (511) 0,28% (200)

Russian rouble 1.93% (1,347) 2,10% (524)

Analysis of currency risk

Currency

2013 2012

Currency assets

Currency liabilities

Long/(short) currency position

Currency assets

Currency liabilities

Long/(short) currency position

US dollars 15,486,714 (15,818,019) (331,305) 20,975,906 (21,110,865) (134,959)

Euro 1,654,363 (1,625,618) 28,745 1,729,324 (1,661,855) 67,469

Russian rouble 256,944 (187,257) 69,687 251,816 (226,834) 24,982

Japanese yen 127,016 (125,655) 1,361 94,005 (97,511) (3,506)

Other 29,816 (28,914) 902 33,362 (29,843) 3,519

Prepayment risk

Prepayment risk is the risk that the Bank will incur a financial loss because its customers and counterparties repay or request repayment earlier or later than expected, such as fixed rate mortgages when interest rates fall.

As at 31 December 2013 and 2012 management believes that the Bank is not exposed to prepayment risk.

Operational risk

Operational risk is the risk of damage occurrence as a consequence of inadequacy or internal processes failure, human error, failure and errors in systems, and also impact of external factors.

All kinds of fraud, legal risk relate to this category and does not relate strategic and reputation risk. In case of failure in the internal controls system, operational risk can cause financial losses, legal or regulatory consequences or adversely affect reputation.

Bank applies standardized approach of Basel I with valid amendments.



49

Concept of control, monitoring and on time reaction on potential risks are effective instrument for risk management. Controls include efficient segregation of duties, access rights, authorization procedures, staff trainings and risks assessment procedures.

Bank has system of operational risks incidents implemented:

- Operational risks assessment involves all employees of the Bank;

- Heads of all units at all levels are responsible for control and operational risks;

- Smooth operation of “Hot line” allows to the Bank’s staff and clients inform about any facts or suspicion of events or actions with potential operational risk, particularly fraud;

- Centralized database implemented with regular periodicity update of information about events / damages or potential threats;

- Plans to support business continuity are developed and their update and testing performed.

Bank conducts annual expert assessment of operational risks, based on which decisions are taken as to implementation of appropriate arrangement for operational risks minimization and prevention.

For control improvement, monitoring, forecasting, early prevention of incidents of operational risk occurrence Bank applies system of key risk indicators, sets limits and performs stress testing. For operational risks concentration assessment scenario analysis is used; it is diagnostic instrument for understanding of consequences from potential operational events.

With intention to reimburse possible losses as a result of operational risk incidents occurrence, Bank conducted risk insurance agreements related to operational activity of the Bank.

Operational risks are reduced due to the package of measures including implementation of operational risk management system, analysis and monitoring of processes and products, training of personnel, their knowledge of operational risks in general, control over compliance with regulatory documents by the Bank’s employees.



50

30. Fair values of financial instruments

The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2013:

At 31 December 2013 Trading Designated at fair value

Held- to-

maturity Loans and

receivables

Available- for-

sale

Other amortised

cost

Total carrying amount Fair value

Cash and cash equivalents - - - 5,734,275 - - 5,734,275 5,734,275

Mandatory reserves in the National Bank of Ukraine - - - 576,312 - - 576,312 576,312

Trading securities 210,622 - - - - - 210,622 210,622

Amounts due from credit institutions - - - 30,271 - - 30,271 30,271

Loans to customers - - - 31,069,913 - - 31,069,913 30,724,514


- designated at fair value through profit or loss - 5,151,277 - - - - 5,151,277 5,151,277

- available-for-sale - - - - 1,172 - 1,172 1,172

- held-to-maturity - - 538,629 - - - 538,629 528,010

Derivative financial instruments - 497 - - - - 497 497

Other financial assets (excluding derivatives) - - - 365,414 - - 365,414 365,414

Financial assets 210,622 5,151,774 538,629 37,776,185 1,172 - 43,678,382 43,322,364

Amounts due to the National Bank of Ukraine - - - - - 402,137 402,137 402,137

Amounts due to credit institutions - - - - - 7,708,249 7,708,249 7,708,249

Amounts due to customers - - - - - 26,832,644 26,832,644 26,832,644

Debt securities issued - - - - - 70,160 70,160 70,160

Subordinated debt - - - - - 2,377,704 2,377,704 2,377,704

Derivative financial instruments - 8,203 - - - - 8,203 8,203

Other financial liabilities (excluding derivatives) - - - - - 120,604 120,604 120,604

Financial liabilities - 8,203 - - - 37,511,498 37,519,701 37,519,701



51

The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as at 31 December 2012:

At 31 December 2012 Trading Designated at fair value

Held-to-maturity

Loans and receivables

Available-for-sale

Other amortised

cost Total carrying

amount Fair value

Cash and cash equivalents - - - 9,773,797 - - 9,773,797 9,773,797

Mandatory reserves in the National Bank of Ukraine - - - 526,494 - - 526,494 526,494

Trading securities 204,540 - - - - - 204,540 204,540

Amounts due from credit institutions - - - 3,525 - - 3,525 3,525

Loans to customers - - - 29,813,198 - - 29,813,198 28,861,280


- designated at fair value through profit or loss - 6,087,472 - - - - 6,087,472 6,087,472

- available-for-sale - - - - 108,163 - 108,163 108,163

- held-to-maturity - - 922,747 - - - 922,747 838,434

Derivative financial instruments - - - - - - -

Other financial assets (excluding derivatives) - - - 211,496 - - 211,496 211,496

Financial assets 204,540 6,087,472 922,747 40,328,510 108,163 - 47,651,432 46,615,201

Amounts due to the National Bank of Ukraine - - - - - 150,586 150,586 150,586

Amounts due to credit institutions - - - - - 11,941,762 11,941,762 11,941,762

Amounts due to customers - - - - - 27,964,034 27,964,034 27,964,034

Debt securities issued - - - - - 37,514 37,514 37,514

Subordinated debt - - - - - 2,374,272 2,374,272 2,374,272

Derivative financial instruments - 171 - - - - 171 171

Other financial liabilities (excluding derivatives) - - - - - 192,801 192,801 192,801

Financial liabilities - 171 - - - 42,660,969 42,661,140 42,661,140



52

Fair value of financial assets and liabilities carried at fair value

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy, classes and subclasses of financial assets and liabilities:

At 31 December 2013 Level 1 Level 2 Level 3 Total

Financial assets

Trading securities:

Ukrainian State Bonds 120,132 41,031 - 161,163

Bonds issued by Ukrainian financial institutions - 48,808 - 48,808

Ukrainian Corporate bonds - - 651 651

120,132 89,839 651 210,622


Ukrainian State Bonds 1,371,642 3,716,687 - 5,088,329


Ukrainian Corporate bonds - 51,574 - 51,574

1,371,642 3,779,635 - 5,151,277

Investment securities available-for-sale:

Ukrainian Corporate shares - 1,172 - 1,172

- 1,172 - 1,172

Derivative financial instruments - 497 - 497

Financial assets at fair value 1,491,774 3,871,143 651 5,363,568


Derivative financial instruments - 8,203 - 8,203

Financial liabilities at fair value - 8,203 - 8,203

At 31 December 2012 Level 1 Level 2 Level 3 Total

Financial assets

Trading securities:

Ukrainian State Bonds 59,986 140,659 - 200,645


Ukrainian Corporate bonds - - 550 550

59,986 144,004 550 204,540


Ukrainian State Bonds 1,436,245 4,634,983 - 6,071,228


Ukrainian Corporate bonds 878 10,366 - 11,244

1,437,123 4,650,349 - 6,087,472

Investment securities available-for-sale:

Ukrainian Corporate shares 103,671 4,492 - 108,163

103,671 4,492 - 108,163

Derivative financial instruments - - - -

Financial assets at fair value 1,600,780 4,798,845 550 6,400,175


Derivative financial instruments - 171 - 171

Financial liabilities at fair value - 171 - 171

Valuation techniques and inputs used in the fair value measurements

The fair value of the instruments that are quoted in active markets are determined using the quoted prices where they represent those at which regularly and recently occurring transactions take place. The Bank uses the valuation techniques to establish the fair value of instruments where prices, quoted on active markets are not available.

The following is a description of the determination of fair value for financial instruments, which are recorded at fair value using valuation techniques. These incorporate the Bank’s estimate of assumptions that a market participant would make when valuing the instruments.



53

Derivatives

Derivatives valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves.

Derivatives valued using a valuation technique with significant non-market observable inputs are primarily long dated option contracts. These derivatives are valued using the binomial models. The models incorporate various non-observable assumptions, which include market rate volatilities.

Trading securities and investment securities

Trading securities and investment securities valued using quotations, a valuation technique or pricing models primarily applied for unquoted equity and debt securities. These securities are valued using models which sometimes only incorporate data observable in the market and at other times use both observable and non-observable data. The observable data include quoted market prices on active markets for similar listed debt securities, interest rates, yield curves, other inputs observable. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, its risk profile, and economic assumptions regarding the industry and geographical jurisdiction in which the investee operates.

Transfers between levels

Transfer between levels caused by amendments on active market and availability of observable market data. During the year ended 31 December 2013, the Bank transferred trading securities from Level 1 to Level 2 in amount UAH 48,808 thousand and investment securities designated at fair value through profit or loss from Level 1 to Level 2 in amount UAH 322,392 thousand. Transfer between levels of hierarchy was made due to changes at the active market.

During the year ended 31 December 2012 the Bank transferred trading securities from Level 1 to Level 2 in amount UAH 130,478 thousand and investment securities designated at fair value through profit or loss from Level 1 to Level 2 in amount UAH 874,237 thousand.

Fair value of financial assets and liabilities not carried at fair value

Set out below is a comparison by class and subclass of the carrying amounts and fair values of the Bank’s financial instruments that are not carried at fair value in the consolidated financial statements. The table does not include the fair values of non-financial assets and non-financial liabilities.

The fair values of loans to customers are categorised into Level 3 of the fair value hierarchy. Valuation is based on cash flows discounted at the ALCO rates.



54

Fair value

2013 Carrying value Unrecognised

loss

Level 1 Level 2 Level 3 Total 2013 2013

Financial assets

Cash and cash equivalents - 5,734,275 - 5,734,275 5,734,275 -

Mandatory reserves in the National Bank of Ukraine - - 576,312 576,312 576,312 -

Amounts due from credit institutions - 30,271 - 30,271 30,271 -

Loans to customers:

Corporate - - 19,659,674 19,659,674 19,581,320 78,354

Small Enterprises - - 2,087,618 2,087,618 2,133,617 (45,999)

Private Individuals - - 7,313,910 7,313,910 7,513,133 (199,223)

Micro Customers - - 1,663,312 1,663,312 1,841,843 (178,531)

- - 30,724,514 30,724,514 31,069,913 (345,399)

Investment securities held-to-maturity:

Ukrainian State Bonds 528,010 - - 528,010 538,629 (10,619)

Other financial assets (excluding derivatives) - - 365,414 365,414 365,414 -

Total financial assets 528,010 5,764,546 31,666,240 37,958,796 38,314,814 (356,018)


Amounts due to the National Bank of Ukraine - 402,137 - 402,137 402,137 -

Amounts due to credit institutions - 7,708,249 - 7,708,249 7,708,249 -

Amounts due to customers

Public sector - 75,771 - 75,771 75,771 -

Corporate - 8,368,802 - 8,368,802 8,368,802 -

Small Enterprises - 1,171,227 - 1,171,227 1,171,227 -

Private Individuals - 14,219,327 - 14,219,327 14,219,327 -

Micro Customers - 2,997,517 - 2,997,517 2,997,517 -

- 26,832,644 - 26,832,644 26,832,644 -

Debt securities issued - 70,160 - 70,160 70,160 -

Subordinated debt - 2,377,704 - 2,377,704 2,377,704 -

Other financial liabilities (excluding derivatives) - - 120,604 120,604 120,604 -

Total financial liabilities - 37,390,894 120,604 37,511,498 37,511,498 -

Total unrecognised change in unrealised fair value (356,018)



55

Fair value

2012 Carrying value Unrecognised

loss

Level 1 Level 2 Level 3 Total 2012 2012

Financial assets

Cash and cash equivalents - 9,773,797 - 9,773,797 9,773,797 -

Mandatory reserves in the National Bank of Ukraine - - 526,494 526,494 526,494 -

Amounts due from credit institutions - 3,525 - 3,525 3,525 -

Loans to customers - - 28,861,280 28,861,280 29,813,198 (951,918)

Investment securities held-to-maturity 838,434 - - 838,434 922,747 (84,313)

Other financial assets (excluding derivatives) - - 211,496 211,496 211,496 -

Total financial assets 838,434 9,777,322 29,599,270 40,215,026 41,251,257 (1,036,231)


Amounts due to the National Bank of Ukraine - 150,586 - 150,586 150,586 -

Amounts due to credit institutions - 11,941,762 - 11,941,762 11,941,762 -

Amounts due to customers - 27,964,034 - 27,964,034 27,964,034 -

Debt securities issued - 37,514 - 37,514 37,514 -

Subordinated debt - 2,374,272 - 2,374,272 2,374,272 -

Other financial liabilities (excluding derivatives) - - 192,801 192,801 192,801 -

Total financial liabilities - 42,468,168 192,801 42,660,969 42,660,969 -

Total unrecognised change in unrealised fair value (1,036,231)



56

The following describes the methodologies and assumptions used to determine fair values for those financial instruments, which are not already recorded at fair value in the consolidated financial statements.

Assets for which fair value approximates carrying value

For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity, variable rate financial instruments and loans issued to private individuals in foreign currencies. Foreign currency lending for this latter group of customers is currently prohibited by the National Bank of Ukraine.

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity. For quoted debt issued, the fair values are calculated based on quoted market prices. For those notes issued where quoted market prices are not available, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity.

31. Maturity analysis of assets and liabilities

The table below shows an analysis of assets and liabilities according to when they are expected to be recovered or settled. See Note 29 “Risk management” for the Bank’s contractual undiscounted repayment obligations.



57

2013 2012

Within one year More than one year Total Within one year More than one year Total

Assets

Cash and cash equivalents 5,734,275 - 5,734,275 9,773,797 - 9,773,797

Mandatory reserves in the National Bank of Ukraine 576,312 - 576,312 526,494 - 526,494

Trading securities 210,622 - 210,622 204,540 - 204,540

Amounts due from credit institutions 30,271 - 30,271 3,525 - 3,525

Loans to customers 17,230,131 13,839,782 31,069,913 17,751,948 12,061,250 29,813,198

Assets held for sale 60,575 - 60,575 352,920 - 352,920


- designated at fair value through profit or loss 2,802,372 2,348,905 5,151,277 1,513,871 4,573,601 6,087,472

- available-for-sale 1,172 - 1,172 108,163 - 108,163

- held-to-maturity 307,933 230,696 538,629 303,262 619,485 922,747

Investment property - 200,558 200,558 - 142,487 142,487

Property and equipment - 2,279,868 2,279,868 - 2,345,734 2,345,734

Intangible assets - 467,157 467,157 - 507,310 507,310

Current income tax asset 5,565 - 5,565 780 24 804

Deferred income tax assets 20,443 16,037 36,480 43,767 1,196 44,963

Other assets 722,720 - 722,720 368,407 - 368,407

Total assets 27,702,391 19,383,003 47,085,394 30,951,474 20,251,087 51,202,561

Liabilities

Amounts due to the National Bank of Ukraine 402,137 - 402,137 150,586 - 150,586

Amounts due to credit institutions 4,293,011 3,415,238 7,708,249 9,854,757 2,087,005 11,941,762

Amounts due to customers 26,786,016 46,628 26,832,644 27,908,229 55,805 27,964,034

Debt securities issued - 70,160 70,160 37,514 - 37,514

Current income tax liabilities 95,762 - 95,762 67,868 - 67,868

Subordinated debt 592,444 1,785,260 2,377,704 29,828 2,344,444 2,374,272

Provisions 25,481 - 25,481 23,420 - 23,420

Other liabilities 573,454 - 573,454 573,598 - 573,598

Total liabilities 32,768,305 5,317,286 38,085,591 38,645,800 4,487,254 43,133,054

Net position (5,065,914) 14,065,717 8,999,803 (7,694,326) 15,763,833 8,069,507



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The maturity analysis does not reflect the historical stability of current accounts. Withdrawals from accounts has historically taken place over a longer period than indicated in the table above. These balances are included in amounts due within one year. Also included in due to customers are term deposits of individuals (Note 21). In accordance with Ukrainian legislation, the Bank is obliged to repay such deposits within two days upon the demand of a depositor. However, the Bank does not expect that many customers will request repayment at dates earlier than their maturity and expects that many deposits will be rolled-over. These balances are included above in accordance with their contractual maturity.

32. Related party transactions

In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties comprise the Parent company, entities under common control, key management personnel and their immediate family members. Key management personnel are those individuals that have the authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly, and include members of the Management Board.

Related parties may enter into transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.



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The outstanding balances of related party transactions are as follows:

2013 2012

Parent Entities under

common control Key management

personnel Parent Entities under


personnel

Loans outstanding at 1 January - - 2,376 - - 1,236

Loans issued during the year - - 252 - - 58

Loan repayments during the year - - (974) - - (808)

Translation differences - - - - - -

Other movements - - - - - 1,890

Loans outstanding at 31 December - - 1,654 - - 2,376

Current accounts with other credit institutions 225,059 32,745 - 3,564,473 89,578 -

Derivative financial instruments (Note 19, 29) 497 - - - - -

Deposits at 1 January 10,902,840 190,077 21,317 14,811,605 159,064 23,595

Deposits received during the year 1,208,365 123,619 36,965 2,613,792 351,613 38,180

Deposits repaid during the year (5,142,699) (180,179) (25,439) (6,615,149) (219,815) (40,717)

Translation differences 2 8,345 479 (7,781) 5,159 (13)

Other movements 9,815 1,019 - 100,373 (105,944) 272

Deposits at 31 December 6,978,323 142,881 33,322 10,902,840 190,077 21,317

Debt securities issued - 70,160 - - 15,350 -

Current accounts at 31 December 348 36,160 1,617 7,301 57,548 2,428

Commitments and guarantees received 224,143 422,067 2,841 264,483 601,108 2,141

The income and expense arising from related party transactions are as follows:

For the year ended 31 December

2013 2012

Parent Entities under


personnel Parent Entities under


personnel

Interest income 1,468 - 216 16,977 - 284

Interest expense (460,316) (13,958) (2,221) (688,594) (20,917) (1,220)

Fee and commission income 990 748 6 42 490 3

Fee and commission expense (11,823) (57,659) - (15,636) (41,686) -

Other operating income - 9 - - 16 -

General administrative expenses (20,898) (9,715) - (23,271) (16,486) -

Net gains/(losses) from derivatives (Note 19, 29) 4,176 - - (1,636) - -



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The aggregate remuneration and other benefits paid to the Management and Supervisory Boards for 2013 is UAH 42,117 thousand (2012 - UAH 31,199 thousand).

Amounts due to the parent company were attracted on the following terms:

2013 2012

Nominal interest rates, % 2.74% - 5.78% 4.81% - 7.08%

Maturity 2014 - 2016 2013 - 2014

33. Capital adequacy

The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank’s capital is monitored using, among other measures, the ratios established by the Basel Capital Accord 1988 and the ratios established by the NBU in supervising the Bank.

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value.

As at 31 December 2013 and 2012 the Bank complied in full with all its externally imposed capital requirements.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

The NBU requires banks to maintain a capital adequacy ratio of 10% of risk-weighted assets (2012 - 10%), computed based on Ukrainian regulatory requirements. At 31 December 2013, the Bank’s capital adequacy ratio on this basis was 20.62% (2012 - 18.76%) and exceeded the statutory minimum.

NBU capital adequacy ratio

2013 2012

Main capital 4,811,608 4,728,371

Additional capital 3,875,734 3,226,733

Less: deductions from capital (206,650) (182,485)

Total capital 8,480,692 7,772,619

Risk weighted assets 34,409,219 32,079,286

Long-term gap 3,543,625 5,777,461

Open foreign exchange position 3,172,645 3,572,199

Capital adequacy ratio 20.62% 18.76%

Capital adequacy ratio under Basel Capital Accord 1988

The Bank’s capital adequacy ratio, computed in accordance with the Basel Capital Accord 1988, with subsequent amendments including the amendment to incorporate market risks, as at 31 December 2013 and 2012 comprised:

2013 2012

Tier 1 capital 8,066,972 7,027,566

Tier 2 capital 2,986,875 3,210,288

Total capital 11,053,847 10,237,854

Risk weighted assets 36,413,501 34,887,941

Tier 1 capital ratio 22.15% 20.14%

Total capital ratio 30.36% 29.34%



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34. Subsequent events

Changes in Ukrainian business environment

In February 2014, following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions and announced a transition to floating foreign exchange rate regime.

In March 2014, the regional parliament in the Autonomous Republic of Crimea declared its independence from Ukraine and signed an agreement with the Russian Federation outlining the Autonomous Republic of Crimea’s intention to join the Russian Federation. The Ukrainian state authorities do not recognise these declarations and agreements as they believe they are in violation of the Ukrainian constitution. However, as a result of these events and the Crimean parliament no longer recognising the authority of the Ukrainian national government, the Ukrainian authorities are not able to enforce Ukrainian laws on the territory of the Autonomous Republic of Crimea. Management has taken steps to reduce the potential adverse effect of these developments in Crimea and as part of these activities, the Bank has sold a portion of its loan portfolio with loans issued primarily to the borrowers located in Crimea.

The final resolution and effects of political crisis are difficult to predict but may have further severe effects on the Ukrainian economy and the Bank's consolidated financial statements.

Changes in foreign exchange rates

Subsequent to 31 December 2013, UAH has further devaluated by more than 30% to USD as compared to 31 December 2013.

Changes in corporate profit tax rates

Subsequent to 31 December 2013, corporate profit tax rate was fixed at the level of 18% starting from 1 January 2014 instead of previously established gradual transition to 16% in 2016. The effect of this change in tax rate on deferred tax position recognized by the Bank as at 31 December 2013 is not significant.

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Other information in accordance with the requirements of the Ukrainian legislation

Pursuant to the requirements of the Resolution No. 2826 dated 3 December 2013 of the National Commission on Securities and Stock Market the Bank discloses the following information as at 31 December 2013:

- Bank’s assets and liabilities as at 31 December 2013 are presented in the Statement of financial position in these consolidated financial statements;

- Bank’s equity components are presented in the Statement of changes in equity for the year ended 31 December 2013 in these consolidated financial statements. Information on Bank’s equity is presented in Note 24;

- Bank’s net assets value is higher than the amount of its share capital (Note 24);

- Share capital of the Bank is fully paid in;

- The Bank does not operate assets of non-state pension funds;

- As at 31 December 2013, the Bank has no registered interest-bearing bonds issued by Raiffeisen Bank Aval JSC;

- The Bank had no mortgage securities issued.

Other events as defined under Article 41, part 1, of the Law of Ukraine “On Securities and Stock Market” that occurred during 2013 are as follows:

- No decisions on treasury shares purchase, during 2013 the Bank sold all treasury shares to a major shareholder Raiffeisen Bank International AG;

- No decisions on placements of securities for the amount exceeding 25% of Bank’s share capital were approved;

- There was no listing/de-listing of Bank’s securities at stock exchange;

- No loan or borrowing was received for the amount exceeding 25% of Bank’s share capital;

- Changes in Bank’s management are as follows:

On 25 April 2013, Herbert Stepic was appointed as Chairman of the Supervisory Board; Peter Lennkh was appointed as Deputy Chairman of the Supervisory Board; Karl Sevelda, Johann Strobl, Aris Bogdaneris, Martin Grüll were appointed as members of the Supervisory Board; Iryna Nestor was appointed as Head of the Audit Commission; Olena Chemeresiuk and Olena Fedorchenko were appointed as members of the Audit Commission.

- There were no changes in shareholders possessing 10% or more of Bank’s voting shares;

- No decisions were approved to open/close an affiliate or a representative office;

- No decisions were approved by the Bank’s supreme governing body to reduce the Bank’s share capital;

- No bankruptcy or reorganization procedures was initiated in respect of the Bank;

- No decisions of Bank’s supreme governing body or court were taken in relation to initiating or suspending bankruptcy procedures.

The Bank’s corporate governance, including its internal audit function

General Meeting of Shareholders is the Bank’s supreme governing body and as such assigns the Supervisory Board responsible for establishing the Bank’s strategy, appointment of members of the Management Board, and approval of the Bank’s structure and business plans.

The Management Board (the Board) is an executive body responsible for governing daily banking operations and reportable to the Supervisory Board. The Board is responsible for establishing controls over and monitoring of risks. The Bank also established management committees primarily responsible for risk management (Note 29), loan approvals, tariffs and assets and liabilities management.

The Bank established Internal Audit Department responsible for independent assessment of organizational structure and controls implementation. Internal Audit Department reports directly to the Supervisory Board.

public joint stock company “raiffeisen bank aval” consolidated … · 2015-01-27 · public...

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